Bob’s Journal for 2/18/21

Some Notable Events That Grabbed My Attention This Week

We had a very successful conference call last week with thousands of subscribers. (A replay is available here.)

As I mentioned in last week’s Bob’s Journal, many questions were submitted in advance by email and a number of listeners wanted to ask questions on the call. We weren’t able to answer all the questions.

In last week’s email, I answered some of the questions we couldn’t address on the call and some that we answered but were asked by more than one reader, indicating there’s a lot of interest in them. This week, I am answering more of the questions from the conference call.

How much of my traditional IRA should I convert to a Roth IRA?

One of the strategies for avoiding future income tax increases is to convert part of your traditional IRA to a Roth IRA. Converting to a Roth IRA also can reduce future required minimum distributions from traditional IRAs, the amount of Social Security benefits that are taxed, the Medicare premium surtax and other Stealth Taxes.

The entire amount you convert must be included in gross income in the year of the conversion. So, converting a substantial amount could push you into a higher tax bracket for the year and reduce the long-term benefits of the conversion. That’s why many people want to limit the amount of a traditional IRA they convert each year.

A good rule of thumb is to convert enough of your IRA to keep you from jumping into the next tax bracket. For example, for the 2020 tax year a married couple filing jointly reached the top of the 22% tax bracket at taxable income of $171,050. For 2021, the top of the bracket will be a little higher because of inflation indexing. If your taxable income is expected to be about $150,000 in 2021, you can convert about $21,000 without jumping into the next tax bracket.

But the next tax bracket is only 24% and tops out at $326,600. It might make a lot of sense to convert enough to push you into the 24% bracket but not so much that you jump into the next higher bracket. That would ensure 24% is the maximum federal income tax rate on that money. The converted amount would avoid tax increases that might be imposed in 2021 or 2022.

The best strategy probably is to use a calculator that shows the costs and benefits of converting different amounts and that allows you to adjust current and future income tax rates. There are a number of IRA conversion calculators available on the internet.

But probably the most flexible IRA Conversion Calculator is the one I developed. It allows you to adjust all the variables so you can see the results under different scenarios. We make it available for $39.95. You can learn more here. Or you can receive it free by signing up for our Lifetime Retirement Protection Program.

How can I avoid the higher capital gains taxes that are coming?

During the 2020 presidential campaign, President Biden proposed increasing the long-term capital gains rate, at least for the wealthy. Many members of Congress support substantial increases in the capital gains tax rate, including taxing long-term capital gains at the same rate as ordinary income.

It is likely that Congress will vote to increase the tax rate on long-term capital gains late in 2021 or sometime in 2022.

One way to protect yourself from higher capital gains taxes is to practice tax-wise investing. A key rule is to limit your trading, which limits taxable capital gains.

Another important rule is to look for paper losses in your portfolio whenever you recognize capital gains. Sell the losing investments so the losses will offset some or all of the gains. In fact, it’s a good idea to take those paper losses even when you don’t anticipate having long-term capital gains for the year. The capital losses that aren’t used in the current year can be carried forward to future years.

Another strategy that might apply to your estate planning is to give appreciated investments to family members who are in lower tax brackets. They could sell the assets and incur lower capital gains taxes. That increases the family’s after-tax wealth.

You also can consider charitable planning with your capital gains if you’re so inclined.

When you contribute to charity an investment with long-term capital gains, neither you nor the charity is taxed on the capital gains. Instead, you receive a charitable contribution deduction equal to the value of the investment on the date of the contribution. The charity can sell the investment at any time without owing any taxes, because it is tax-exempt.

Another strategy is to donate appreciated property in return for a charitable gift annuity. You’ll receive a charitable contribution deduction for part of the value of the property. In addition, the charity will pay you income for the rest of your life, or the joint life of you and your spouse. The appreciation on the donated property won’t be taxed.

Or you can contribute appreciated investment property to a charitable remainder trust. Again, you’ll receive a charitable contribution deduction for part of the investment’s value and won’t owe taxes on the capital gains. The trust will pay you income for life. You decide whether the trust will pay you a fixed amount each year or a percentage of the trust’s value. The charity receives whatever is left in the trust after you pass away.

These are ways you can reduce or avoid the higher capital gains taxes in the future.

Since Roth IRAs also are subject to the SECURE Act, does it make sense to take money out of the Roth IRA and use it to buy life insurance?

Under the Setting Every Community Up for Retirement Act (SECURE Act), most inherited individual retirement arrangements (IRAs) have to be fully distributed to the beneficiaries within 10 years. This applies to both traditional and Roth IRAs.

Taking the money out of a Roth IRA (or a traditional IRA) to buy permanent life insurance payable to your children or grandchildren has several advantages.

The life insurance benefits are tax free when paid to your beneficiaries. In addition, the amount of the benefits is guaranteed by the insurance company. The amount your loved ones inherit won’t vary with the investment markets or how well the IRA is managed.

Life insurance also provides leverage. Many healthy adults will be able to use their IRAs to buy life insurance with benefits that exceed the current amount of their IRA balances. The details depend on your age, health and the insurer you choose. But it is not unusual for life insurance to provide a greater inheritance to beneficiaries than if you retained and invested the IRA.

In addition, the life insurance can be made payable to a trust for the benefit of your children and grandchildren. You can appoint a trustee who will make sure the insurance benefits are professionally managed. The trust also can be set up to limit distributions to the beneficiaries for a period of years, ensuring the money isn’t wasted and is available for the beneficiaries in later years when it’s really needed.

Having the money last for a long time was the point of the Stretch IRA that was eliminated by the SECURE Act. That goal can be achieved by repositioning the IRA as a life insurance policy.

You can learn more about how an IRA can be repositioned into life insurance by reading the reports that come with our Lifetime Retirement Protection Program or by contacting David Phillips of Estate Planning Specialists at 1-888-892-1102.

The Data

New unemployment claims increased to 861,000 in the latest week from 848,000 the week prior. That’s the highest number of new claims in a month. In addition, the previous week’s claims were revised higher from the 793,000 that were initially reported.

Continuing claims declined by 64,000 to 4.5 million.

The total number of people receiving benefits under one of the unemployment compensation programs declined by 1.3 million to 18.34 million.

Retail sales ended a three-month streak of declines by increasing 5.3% in January. Furniture and electronic sales each increased by double-digit percentages for the month. Bar and restaurant sales, which have suffered greatly during the pandemic, increased 6.9% from December’s level.

Consumer Sentiment, as measured by the University of Michigan, tumbled in early February. The Consumer Sentiment Index was reported as 76.2. That’s down from 79.0 in January and is substantially lower than the 101 it stood at 12 months earlier, before the pandemic accelerated.

The biggest changes in sentiment were among those making less than $75,000. They reported significant setbacks in their finances and were more pessimistic about the future.

Industrial Production increased 0.9% in January, following a revised 1.3% increase in December. Industrial Production has increased an average of about 1.0% monthly over the last five months.

The manufacturing component of production increased 1.0% in January, which compares to a 0.9% increase in December.

Total Industrial Production still is 1.8% lower than 12 months ago.

The Empire State Manufacturing Index for February jumped to 12.1 from 3.5 in January. That’s its highest level since July 2020.

Survey respondents were optimistic about the next six months and plan to increase capital spending in coming months.

The survey also showed signs of rising inflation. Respondents indicated prices of their inputs increased at the fastest rate in nearly a decade and their selling prices also rose significantly.

The Philadelphia Fed Manufacturing Index for February was reported as 23.1, down a little from 26.5 in January. The index was at only 9.1 in November.

The component of the index with the biggest decline was the outlook for the next six months, which declined to 39.5 from 52.8.

Home builders remain optimistic. The Housing Market Index from the National Association of Home Builders (NAHB) increased to 84 in February from 83 in January.

The home builders report that demand for new homes remains strong. The builders are hampered by rising lumber prices and supply delivery problems.

The current sales conditions component of the index was unchanged at 90, but the sales expectations over the next six months component declined three points to 80.

Housing starts declined by 6.0% in January from December’s level. The January starts were 2.3% lower than January of a year ago.

Single-family home starts in January were 12.2% below December’s level. But over 12 months single family home starts were 17% higher.

The Producer Price Index increased 1.3% in January. That’s a big jump from the 0.3% advance in December and is the largest one-month increase in more than 10 years. Over 12 months, the PPI is up 1.7%.

Excluding food and energy, the PPI increased 1.2% in January and 2.0% over the past 12 months.

The Markets

The S&P 500 rose 0.59% for the week ended with Wednesday’s close. The Dow Jones Industrial Average gained 0.67%. The Russell 2000 lost 1.24%. The All-Country World Index (excluding U.S. stocks) added 1.41%. Emerging market equities increased 1.44%.

Long-term treasuries lost 2.66% for the week. Investment-grade bonds fell 0.80%. Treasury Inflation-Protected Securities (TIPS) declined 0.80%. High-yield bonds gained 0.01%.

In the currency arena, the U.S. dollar increased 0.45%.

Energy-based commodities increased 3.36%. Broader-based commodities rose 2.41%, while gold declined 3.70%.

Bob’s News & Updates

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