Traditions Wealth Advisors
Brien L. Smith, CFP®/Kristina Badrak
TWA CEO/Financial Analyst Intern
February 23, 2024
Consumer Price Index
Amid fluctuating economic forecasts, January 2024 Consumer Price Index (CPI) data release stands as a testament to resilience in the face of adversity. Capturing the spending patterns of urban households, which constitutes about 93% of the U.S. populace, the CPI saw a year-over-year increase of 3.1% and a month-over-month growth of 0.3% in January—figures that exceed the modest 2.9% annual inflation rate anticipated by analysts. This unexpected rise not only indicates concerning developments for markets and policymakers alike but also signals that the Federal Reserve might need to maintain higher interest rates for an extended period to counter inflationary pressures.
According to the Bureau of Labor Statistics (BLS), the shelter sector emerged as the dominant driver of January's inflation, contributing 36.191% to the CPI's weight. This sector experienced its most significant price jump since April 2022, with a 6% rise on an annual basis. The shelter index is broken down into four critical components: owners' equivalent rent (OER), rent of primary residence, lodging away from home, and tenants' and household insurance. Notably, OER and rent of primary residence, with CPI weightings of 26.770% and 7.671% respectively, stress the extensive nature of housing costs. OER, an estimate of what homeowners would pay in rent for comparable living spaces, alongside rent of primary residence—the direct rent costs faced by tenants—underline the scope of housing expenses. Despite the Bureau of Labor Statistics (BLS) updating its approach in January 2023 to use one year of spending data for CPI calculations, thereby reducing the data inclusion lag from consumer purchases from 36 to 24 months, the Federal Reserve continues to prefer the Personal Consumption Expenditures (PCE) Price Index for assessing inflation.
The forthcoming PCE report, due on February 29th, is anticipated to have a significant impact on the Federal Reserve's monetary policy decisions. The index is highly regarded by the Fed over CPI for several reasons: it covers a wider range of household expenditures, including those paid on behalf of consumers, and more accurately reflects changes in consumer behavior and the substitution effect.
Recent evaluations by Morgan Stanley indicate an expected uptick in January's core PCE to 0.29% monthly, marking a rise from the previous 0.17%, spurred by CPI increases. In a similar vein, Goldman Sachs has recalibrated its economic forecast, trimming its prediction for first-quarter growth from 2.9% to 2.3% and elevating its projection for January's core PCE inflation from 0.35% to 0.43%.
The upcoming week is anticipated to shed light on these inflationary patterns in hopes of providing a more detailed understanding of the current and future fiscal environment. With the PCE prized by the Fed for inflation monitoring, the indicator will play a crucial role in guiding interest rate strategies. The notable gap between PCE and CPI, especially given the persistent rise in shelter costs affecting the CPI, stresses the complex challenges of navigating the lasting effects of the pandemic.
Tax season is here! Tax-related identity theft happens when criminals use your personal information to file a return in your name and claim your refund. Victims are waiting an average of almost 19 months for the IRS to process their returns and issue refunds, the National Taxpayer Advocate reported. There are also two key steps taxpayers can take to protect themselves.
1. File EARLY!
One of the best ways to avoid tax-related identity theft this season is by filing your return early. Do not let the scammers have time to come in and steal your information. File before they can! Further, protect your online filing with strong passwords and multi-factor authentication.
2. Get an identity protection pin!
If you’re looking for added protection, experts suggest getting an identity protection PIN, or IP PIN, from the IRS. This six-digit number blocks others from using your Social Security number or individual taxpayer identification number to file a tax return. Once you enroll, the agency generates a new IP PIN for you each year. Previously, IP PINs were only for identity theft victims. Now, they’ve opened it to everyone. However, it is too last minute to get an IP pin before filing your 2023 return. It is best to file your 2023 return now, and get an IP PIN for next year. Want to learn more about the IP PIN and how to get one? Click here.
Please reach out to our in-house, tax-smart planning director, Laurie@TraditionsWealthAdvisors.com or call her at 979-694-9100 with more details and questions about the above article.
Traditions Wealth Advisors
Kristina Badrak/Brien L. Smith, CFP®
Financial Analyst Intern/Certified Financial Planner
In the fourth quarter of 2024, the U.S. GDP grew by 3.3% marking a modest slowdown while demonstrating economic resilience. Core PCE, which gauges household consumption, rose 2.9% in December, slowing from November's 3.2% and falling below the 3.0% for the first time in the past three years. Conversely, the CPI, tracking urban household expenditures, unexpectedly climbed by 0.3% monthly, lifting the annual inflation rate to 3.4%. This rise in CPI was primarily fueled by escalating costs in essentials such as rent, food, gasoline, and notably, used car prices.
Despite these trends, the PCE remains the Fed policymakers' preferred metric for interest rate decisions, particularly because it accounts for changes in consumer behavior. The current trajectory suggests only a 40% chance of a rate cut in March with many economists predicting one in either April or June due to existing uncertainties. On a different note, the job market remains strong keeping the unemployment rate steadily below 4%, this is mirrored in a 0.4% increase in average hourly earnings and a slight rise in labor force participation to 62.8%. In addition, unemployment claims the week of 20th have increased by 25,000 compared to last week, which recorded the lowest level of claims since September 2022.
The indicators within the job market are at an adequate level of stability and are not adding stress to the economy. Considering all these factors, including robust household spending and market uncertainties, the Fed’s meeting on January 31st will hopefully provide us with some insights into the decision regarding rate cuts in the spring.
The Congressional Budget Office warns that by 2033, Social Security trust funds will face insolvency, with projections indicating only 75% coverage of scheduled benefits. This is due to the aging population growing faster than the workforce, decreasing the ratio of workers to Social Security beneficiaries from 5.4 to 1 twenty years ago, to 3.8 to 1 today. According to John Mauldin, addressing the debt crisis requires focusing on Social Security and Medicare reforms or raising middle-class taxes since other reforms are insufficient. Medicare and Social Security's combined long-term unfunded obligations represent 95% of the federal government's total unfunded obligations. Over the next decade, Social Security will add nearly $3 trillion to the national debt. At the moment, one of the popular drafted proposals by legislators is to limit the income cap for those earning over $400,000, thereby closing tax loopholes. With presidential elections on the horizon, the incoming administration's stance will be crucial in shaping the future of these vital programs.
Outlook of the Market
According to BlackRock, stock markets typically experience a “sluggish” first half but stronger second half during presidential election years, with the third quarter often yielding a 6.2% return. In addition, during post-Federal Reserve rate cuts, cash yields usually drop quickly. Additionally, high-yield bonds and small-cap stocks tend to be critical recession predictors, typically experiencing declines ahead of an economic downturn. Within the past month, small-cap stocks, particularly the Russell 2000 Index, outperformed large caps with a 14.0% return, correlating with the 3.3% GDP growth in the 4th quarter, supporting the notion that small caps thrive when GDP slows down. Concerns about an economic downturn, however, should be tempered as the government has the capacity to reduce interest rates, thereby facilitating a smoother, more controlled economic landing if necessary. Moreover, the increasing trend in index fund investments contributes to a well-diversified portfolios, effectively spreading out and mitigating risk.
1. What happens if I give a gift in 2024 when it’s $13.61 million per person and then the exemption is reduced to something like $7 million later? If I start gifting significant amounts while I'm alive, will this cause problems when the current limits sunset after 2025, or if they are changed sooner?
Under current law there will be no "clawback" of exemption previously used that would cause estate taxes on the extra gifted amount. This would still be the case even if the changes to the exemption amounts are put into effect as of an earlier date. Individuals can also give away money annually up to the current limit, which is $18,000 in 2024, to as many people as they would like before it impacts the lifetime limit.
2. For estate taxes, does it matter what types of accounts I'm leaving to heirs? What if all my money is in a retirement account, like a 401(k), or it's all in a brokerage account or some other type of account? Do I need to start reorganizing how my money is held given the changes ahead?
The federal estate tax applies to the value of all assets that a decedent owns or controls at death, regardless of the type of account in which the asset is held. Another option to consider, is that only assets held in certain types of accounts can be efficiently transferred. For example, retirement accounts, such as 401(k)s or traditional IRAs, cannot be transferred to a third party during the account holder's lifetime without triggering income taxes and possibly penalties.
3. If I'm leaving real estate to my heirs and they aren't going to sell it, do any possible changes in the estate tax matter to me? Would my heirs possibly be hit with a tax bill upon inheriting and have to come up with the cash? Does the same apply for leaving rental property, a family business, or a share in a business?
Any estate tax liability is generally the obligation of the decedent's estate, and not the beneficiaries who will inherit the property. The beneficiaries' plans for the assets are not relevant to the taxation of the inherited asset. The value of all real estate would be included in the decedent's gross estate and could be subject to the estate tax, depending on the aggregate size of the estate. That said, for those in states with an inheritance tax, the beneficiary is typically responsible for paying the tax due. Six states have an inheritance tax: Nebraska, Iowa, Kentucky, Maryland, Pennsylvania, and New Jersey.
4. How should I deal with life insurance and my estate? Will any of that change in 2026?
The death benefit of life insurance is considered part of the decedent's gross estate. However, because an irrevocable trust is a separate and distinct entity for estate tax purposes, the value of a life insurance policy owned by the trust would not be included in the estate of the insured.
5. I haven't touched my estate plan in 10 years and I no longer have an estate attorney or anyone to consult. How often do I need to revisit my plan and can you recommend anyone to help me? How do I even get started with so much in flux with the laws?
A good practice is to review your estate plan every 3 to 5 years, and potentially more frequently if certain life events intervene, such as:
by Denise Appleby, APA, CISP, CRC, CRPS, CRSP
Since the Roth IRA was introduced in 1998, the Roth-versus-traditional-IRA debate has been a hot topic, with various arguments being made for one or the other. A key selling point for those who favor Roth IRAs is that the upfront cost of paying taxes on contributions when they are made will be rewarded with tax-free earnings. But Roth IRA earnings are tax-free only if they are part of a qualified distribution. For interested parties, the question becomes, “How does one know if a Roth IRA distribution is qualified?” And if the distribution isn’t qualified, “What are the tax implications?”
The following two steps can be used to help provide the answers to these questions.
Step 1: Determine if the Roth IRA distribution is qualified. A Roth IRA distribution is qualified if it meets the following two requirements:
1. It occurs at least five years after the owner first funded a Roth IRA. This funding can be with a valid regular Roth IRA contribution or a qualified rollover contribution. A qualified rollover contribution is a conversion from a traditional IRA, SEP IRA, a SIMPLE IRA—providing that the SIMPLE IRA has been funded for at least two years at the time of the conversion, or a rollover of traditional (non-Roth) amounts from an employer-sponsored retirement plan.
2. The distribution is made under any of the following circumstances:
1. The rule starts with the owner’s first Roth IRA: The five-year period for a qualified Roth IRA distribution starts January 1 of the first year that the Roth IRA owner funded any Roth IRA.
Example: John made a regular Roth IRA contribution in February 2023 for 2022. Making this contribution is the first time John funded a Roth IRA. John converted his traditional IRA to his Roth IRA in 2023. John’s five-year period for determining if he meets Five-Year Rule Number One is January 1, 2022. If John had made the regular Roth IRA contribution for 2023, his five-year period for determining if he meets Five-Year Rule Number One would have started on January 1, 2023.
2. It does not restart.
Example: Susie converted $5,000 to her Roth IRA in 2015. This conversion is her first Roth IRA funding. She withdrew the entire amount, including earnings, in 2016. She no longer has a Roth IRA at this point. Susie started a new Roth IRA in 2023. When Susie takes a distribution from this new Roth IRA, the five-year period for a qualified distribution still starts January 1, 2015, even though the 2015 Roth IRA was fully distributed and closed.
3. A beneficiary inherits a Roth IRA owner’s five-year clock. A distribution from a beneficiary Roth IRA is qualified if it meets Five-Year Rule Number One. The five-year period is inherited from the owner. Using the example of Susie above, if she dies in 2023, the five-year period for her inherited Roth IRA starts January 1, 2015. All of an individual’s Roth IRAs (not including beneficiary Roth IRAs) are aggregated and treated as one to determine if Five-Year Rule Number One is satisfied. No further assessment is needed if a Roth IRA distribution is qualified because the distribution is tax-free; there is no federal income tax, and there is no 10% additional tax (early distribution penalty). If a Roth IRA distribution is nonqualified, then Step 2 must be taken.
Step 2: Apply the ordering rules for nonqualified distributions. A Roth IRA distribution is nonqualified if it does not meet the two requirements above. The ordering rules must be used to determine what portion of a nonqualified distribution is subject to income tax and/or the 10% early distribution penalty. Under the ordering rules, distributions are taken from the following layers of sources in the order listed.
1. Layer 1 consists of regular Roth IRA contributions and rollover of basis amounts from designated Roth accounts. A designated Roth account can be a Roth 401(k), Roth 403(b), or governmental Roth 457(b) account. All an individual’s Roth IRAs (not including beneficiary Roth IRAs) are aggregated and treated as one to determine an individual’s total amount in Layer 1. Distributions from Layer 1 are tax-free.
2. Layer 2 consists of qualified rollover contributions. (See above under Step 1: Determine if the Roth IRA Distribution Is Qualified). Distributions from Layer 2 are tax-free. However, if the distribution occurs before the Roth IRA owner is at least age 59½, it is subject to a 10% early distribution penalty tax unless the distribution qualifies for an exception. One of the exceptions is Five-Year Rule Number Two. Under Five-Year Rule Number Two, the five-year period starts January 1 of the year the qualified rollover contributions are done and applies separately to each year. All of an individual’s qualified rollover contributions (not including rollovers to beneficiary Roth IRAs) are aggregated by year to determine an individual’s total amount in Layer 2.
Example: 45-year-old Tara converted $75,000 from her traditional IRA to her Roth IRA in 2018, and $25,000 from her SEP IRA to her Roth IRA in 2018. This is a total of $100,000 for 2018. Tara also converted $50,000 from her traditional IRA to her Roth IRA in 2023. The $100,000 2018 conversion will be distributed before the $50,000 2023 conversion.
Scenario 1: If Tara distributes the $100,000 in 2023, it will not be subject to the 10% early distribution penalty because it would have been at least five years since it was converted to her Roth IRA.
Scenario 2: If Tara distributes the $100,000 and the $50,000 in 2024, only the $50,000 would be subject to the 10% early distribution penalty because it would not have been at least five years since it (the $50,000) was converted to her Roth IRA. The 10% early distribution penalty would be waived if Tara qualifies for an exception. One would only get to Layer 2 once the entire amount in Layer 1 is distributed.
3. Layer 3 consists of earnings accrued in the Roth IRA and the earnings portion of a nonqualified distribution from a designated Roth account. All of an individual’s Roth IRAs (not including beneficiary Roth IRAs) are aggregated and treated as one for purposes of determining an individual’s total amount in Layer 3. One would only get to Layer 3 once the entire amount in Layer 2 is distributed. The road to tax-free Roth IRA distributions. The goal of saving in a Roth IRA is to get tax-free distributions—including no 10% early distribution penalty. If one cannot wait until one is eligible for a qualified distribution, the next best strategy is to ensure withdrawals consist only of amounts from Layer 1 as those amounts would be tax-free and penalty-free. For Layer 2, one could wait five years to avoid the 10% early distribution penalty on distributions if one is under age 59½ and does not qualify for an exception. For earnings, the only way to avoid income tax is to ensure the distribution is qualified. However, the 10% early distribution penalty can be avoided if one qualifies for an exception.
To find out if your Roth IRA distribution is taxable, please reach out to Brien or Laurie, Brien@TraditionsWealthAdvisors.com Laurie@TraditionsWealthAdvisors.com or 979-694-9100.
As you can see, there are definite advantages to both approaches. Starter homes are more likely to be cheaper and allow you to start building equity sooner, but you may outgrow them. A forever home will probably be much more in terms of your monthly payment, but you’ll have a space with more of what you want and a lasting place to build a life for yourself. Check with your financial professional first before making this large purchase and feel free to ask questions to Brien@TraditionsWealthAdvisors.com
Overall the economic reports last week were positive for equities, even though bond yields rose after their very steep decline over the last two months. Data was trending soft recently—not recession level but indicating soft activity. That tone reversed last week.
Then the labor market report last Friday confirmed underlying health. The new jobs number came in pretty much with expectations, except the unemployment rate which dropped from 3.9% to 3.7%. This drop of unemployment is why bond yields jumped over 10 basis points (bps).
Year-over-year wage growth was 4% but given how strong the productivity numbers have come in, this is not inflationary. In fact, unit labor costs are negative this year, so I do not regard data on the labor front as inflationary. I also like that the labor participation rate ticked up one tenth—this brings in further slack and lowers wage pressures. The household jobs report was also very strong, reversing some of the losses in the previous month. Of course, that report is much more volatile because of the smaller sample size.
We also received really good numbers from the University of Michigan Consumer Sentiment surveys. One-year inflation expectations dropped from 4.3% to 3.1%—one of the biggest one-month drops in this survey I have ever seen. The five-year inflation expectations dropped from 3.1 to 2.8%.
So, a cautionary tale: don't put any credence in the one-year-ahead forecast of the FOMC(Federal Open Market Committee). Jerome Powell (Chair of the Federal Reserve) will want to keep optionality of raising rates, particularly if there is a hot inflation report. But the data—commodity prices, oil prices and everything else—do not look inflationary.
The primary risk to equities in the first half of 2024 is a Fed that remains too stubborn to see the downward inflation path. If Powell is overly stubborn, we could see up to a 10% correction in the first half of the year, but I expect 2024 to close fairly strong once the Fed finally gets it.
The technicals of the market currently look quite strong, and I see December continuing these positive trends. I see the 10-year Treasury not going much below 4% and Fed funds rate down to 3.5% by year end. Given what I see for earnings, I think the equity market is poised to perform well, and while I expect the productivity trends from advances in technology to support real economic growth, there could be a broadening participation in equity markets beyond the Magnificent 7 tech stocks.
The above article is commentary from Professor Jeremy Siegel a world-renowned expert on the economy and financial markets. Siegel is the winner of dozens of awards for his research, writing, and teaching. He served for 15 years as head of economics training at JP Morgan and is currently the academic director of the U.S. Securities Industry Institute.
The world of retail used to explode the day after Thanksgiving. To shoppers of a certain age, the term “Black Friday” used to mean a lot of things, including early mornings, long lines, and near-riots in store aisles. But since the rise of ecommerce, Black Friday turned into Cyber Monday. Lately, there have been more and more days throughout the year that see online retailers holding large price markdowns, but Cyber Monday still reigns supreme.
With all of the pomp and circumstance around online shopping and deal days, you need to be prepared. It’s easy to be distracted by all of the emails and ads you see about sales and end up buying things you don’t want, or even worse, grabbing items that aren’t even discounted. Check out these Cyber Monday strategies:
1. Give yourself a Cyber Monday budget
2. Identify your targets
3. Bookmark your online stores
4. Follow your stores on social
5. Sign up for newsletters
6. Look for gift codes first
7. Know your return policies
8. Automate price comparison
9. Avoid suspicious sites
10. Shop privately
11. Use a rewards card if you have one
12. Finally, keep an eye on your accounts
Each year, Cyber Monday changes and evolves. As this is written, there’s no telling what tech trends will get the most deals and which retailers will offer the most markdowns. That’s why it’s so important to start with a strategy that can help you maximize your deal making ability and set yourself up to be most impressive gift giver this holiday season.
To find out more details on each of the above tips, visit https://www.rate.com/resources/cyber-monday-strategies
More than three-and-a-half years after COVID struck, the U.S. still has around 2 million more retirees than predicted, in one of the most striking and enduring changes to the nation’s labor force.
The so-called, 'Great Retirement,' induced by COVID-19 is evident in the divergence between the actual number of retirees and that predicted by a Federal Reserve economic model. While down from a 2.8 million gap late last year, it remains elevated today and has even risen from 1.7 million in June.
Before the pandemic, the participation rate for workers age 65 and older reached 20.8% before dropping two-and-a-half percentage points by July 2021. The rate has since risen a percentage point to 19.3% but remains well below the pre-pandemic high.
The lack of older workers is creating some shortages. In Michigan, a state law was tweaked to make it easier for teachers to “un-retire” without risking their pensions.
Before this summer’s rise in excess retirees, there was speculation that a whole “un-retirement” wave was under way, but that seems to have not been the reality.
For many older Americans, leaving the labor market is a one-way street. While many may miss the routine and stimulation and want to resume work for financial reasons, rejoining the workforce can be difficult.
Skills decline, work connections rapidly fade and job-seekers may confront an age gap, all making it harder for many older workers to find a job. In 2022, the mean duration to find a job for people age 65 and older was 31.6 weeks, 9 weeks longer that the overall average.
Before the pandemic, from 2017 to 2019, roughly 3% of retired workers on average ended up having a job a year later.