For the second year in a row I am a daily listener to Lance Armstrong’s podcast covering the 2018 Tour de France. As a race, the Tour’s terrain is always full of variety: flat stages, mountainous stages, and even stages with miles of cobblestones. As someone who has experienced the trials and tribulations of le Tour firsthand, Lance is rarely one to try and predict a winner. As an evidence-based investor, you also know how futile market predictions can be.

As a rider, like an investor, we can only control our actions. Riders have no control over the terrain, the weather, or the dense crowds (eh-hmm, hooligan fans) lining the roads. As an investor, we have no control over the amalgam of forces that create positive/negative market returns (i.e.  geopolitics, interest rates, currency risk etc.). Even when being pragmatic with all of the things that are in our control, we are never free from setbacks. This brings us back to the point of this article: recessions.

Looking at the chart below, we see that recessions occur roughly every four years. Given that our last recession was in 2009, it would seem that we’re due. When? Good luck guessing that one. All riders in the Tour know that there will be crashes; it’s simply a matter of when. As an investor, we need not forget that like crashes on the Tour, recessions are also a matter of when.

Market growth is not something that can continue indefinitely, economies need recessions to filter out the poor performers and allow opportunity for new entrants. In the Tour de France, how riders navigate the setbacks and challenging times can often be indicative to their overall performance. As an investor, those with the guts and capital to make purchases during a recession are the winners (i.e. buying depressed assets at a discount). Warren Buffett once shared the sage advice to “be fearful when others are greedy, and be greedy when others are fearful.” I’d have to ask Lance, but I feel like this holds true in both our financial markets and the Tour.

For those planning to retire or begin drawing down their assets in the near future (within the next 1-5 years), portfolio management can become a bit more nuanced. In short, it’s imperative to set aside at least a few years of living expenses in safe investments (i.e. short-term bonds with high credit quality). Why? Having these funds on the sidelines during a recession will allow you to ride out the market tumult, to not sell your equity positions out of necessity, and to be patient in waiting for the market recovery.

Aside from your portfolio allocation, the other area within your control as an investor (and arguably even more important) is your spending. If a Tour de France rider exerts all of his energy on the first mountain incline, how will he fare later in the Tour? Depleting too much energy too early in the Tour would be short-sighted and result in lackluster performance. Now, think of that same rider who exerted too much energy too early that now faces an immense challenge that is beyond his control. Good luck Chuck.

As an investor, depleting too much of your portfolio too early could have even more dire consequences than a cyclist overexerting themselves. In the event of a recession, those who rely on their portfolio assets for monthly/annual cash needs may be fine if maintaining a lifestyle within their means. However, for those living above their means, this perfect storm of a recessionary market combined with overspending will deteriorate a portfolio quickly. Trying to tighten your spending during a recession is fine, but for those in later stages of life who are already drawing down their assets for living expenses, decreased spending during a recession could be a case of too little too late.

Regardless of life stage, having a properly allocated portfolio and being conscious of your cash inflows and outflows is crucial to know in advance of a recession. Like a competitive cyclist, focus on what you can control. Whether cycling or investing, always work to be in a position of strength. If questions, contact us for a review so that when the sky is falling and market analysts cry catastrophe, you can kick back and enjoy the lighter things in life – like the Tour de France.

The Tax Cuts and Jobs Act of 2017 imposed significant changes to the 2018 tax code especially for self-employed people but one area it did not change is the benefit of Solo 401(k) or individual 401(k) plans. These retirement plans are designed for companies with one employee (or an employee and spouse) that want to maximize retirement savings.  Unlike SEP IRAs, traditional IRAs and traditional 401(k) plans, the Solo 401(k) provides both tremendous tax advantages and low operating costs to set-up and maintain.

A Solo 401(k) offers the same maximum annual pre-tax contribution amount as a traditional 401(k). For 2018, the amount is $18,500 (a $500 increase from 2017) for those younger than age 50. People that turn 50 or older in 2018 can contribute an additional “catch-up” contribution of $6,000. These contributions are deemed employee contributions.  A major benefit of the Solo 401(k) for less profitable companies is the ability to contribute up to 100% of your self-employed earnings towards this employee contribution. For example, if your company has a profit of $20,000 then $18,500 can be contributed as an employee contribution if you are under 50 and $20,000 can be contributed if 50 or older. Not only are these contributions tax deductible against your Federal income but also against your New Jersey income. Employee contributions must be completed by December 31^st.

In addition, a Solo 401(k) offers the opportunity for pre-tax employer contributions with a maximum of $36,500. This amount is based on up to 20% of your net self-employment income (business income minus half your self-employment tax). Employer contributions must be completed by deadline to file taxes.

These are huge tax savings and allow self-employed people to save aggressively for retirement.

Another advantage is the low cost to set-up and operate the Solo 401(k) plan. Fidelity is renowned for offering Solo 401(k) plans without set-up costs or annual fees.

Children’s Impact Under Tax Reform

With the recent overhaul of the US tax system, it comes as no surprise that many are still trying to decipher how they are impacted by the changes. While media pundits have been quick to highlight the most dramatic changes (i.e. mortgage interest limitations, state tax deduction limits, lowered corporate taxes), few have touched on how this reform will impact individuals/families with children under 18 years old. To summarize these changes:

Enhanced Child Credit:

• Expanded from $1,000 per qualifying child to $2,000
• New $500 credit is available for qualifying dependents not eligible for the full $2,000 credit (this is intended to make up for taxpayers no longer being able to claim their dependent parents as personal exemptions).
• Most notable point for LFA clients: Credits begin to phase out once income exceeds $400k for married couples, $200k for all other taxpayers. This is an increase from the former phase-outs of $110k for married couples, $55k for all others. Many more LFA clients will qualify for this credit.

529 plans:

• 529 savings plans have been a tax-efficient way to save for future education expenses on behalf of a designated beneficiary, such as a child or grandchild. Before tax reform, these accounts were strictly reserved for college and post-secondary training. Now, up to $10,000/year may be withdrawn from these accounts to cover the costs of K-12 expenses (includes expenses for public, private, and religious schools).
• Qualified 529 expenses remain pretty much the same as they were previous to tax reform: Tuition, room and board, technology (computers/printers/laptops/software), books and supplies, certain homeschooling expenses (new).

Kiddie tax

• Prior to tax reform, the tax code allowed for parents to transfer appreciated securities to their children and for their children to sell the securities and recognize the gain (at lower rates than if the parent had exercised). Transfers of income like this are still allowed and slightly more favorable…as long as the strategy keeps capital gains, interest, and dividends below the $2,600 – 0% tax rate.
• Earned income, however is subject to higher rates at lower income levels.
• Previous kiddie tax rules stated that, at worst, the child’s income would be taxed at the parents’ tax rate. Now, children’s ordinary income and/or capital gains are taxed at the same rates as trusts, listed below:

As with all financial planning topics, feel free to contact us to discuss how new tax law changes affect you! 

[et_pb_section admin_label=”section”]
[et_pb_row admin_label=”row”]
[et_pb_column type=”4_4″]
[et_pb_text admin_label=”Text”]
At Lighthouse Financial Advisors, we strive to educate our clients that the location of their assets is often just as important as the funds they invest in – this rule is no exception when it comes to utilizing 529 plans. While most investment companies have faced an increased pressure to reduce their fees, most 529 plans have not. Why?

1. Most states incentivize their residents to participate in 529 plans by offering a tax deduction for contributions.
2. States only offer a limited menu of 529 plans (usually 1-3 different plan options).

The combination of these two factors has resulted in parents/grandparents simply settling with one of their state’s 529 plan offerings. With the steady flow of participants to state-designated 529 plans, fund managers have had little incentive to reduce their costs.

What many folks don’t realize is that a number of states (16 to be exact, NJ is one of them!) offer no substantive benefits (i.e. tax deductions) for using their state-designated 529 plans. To add insult to injury, Morningstar has just downgraded NJ’s Franklin Templeton 529 College Savings plan (1 of the 2 plans offered by NJ) from neutral to negative. REASON: The NJ Franklin Templeton plan’s most popular option, their “Growth” age-based plan, has an average fee of 1.19% while the national average expense ratio of 529 plans is .55%. Morningstar wrote about the NJ Franklin Templeton plan, saying that “subpar oversight at the state and program manager level decrease our confidence in the plan’s long-term prospects.” NOT the most promising review…

IMPACT:
If you invested $24,000 when your child/grandchild was three years old and left the funds untouched for 15 years, an average annual return of 7% would result in the NJ Franklin Templeton plan growing to $55,990 while the “average” 529 plan would have reached $61,291. An even lower-fee 529 plan (like one offered through Vanguard*) would have grown to $63,665 over that same period.

ACTION:
– NJ Residents: Given NJ’s lack of 529 tax incentives and less-than-compelling 529 plans, we advise clients to explore their options. Great options to consider include:

• Utah (UESP 529 – https://www.uesp.org/)
• West Virginia (Smart 529 – http://www.smart529select.com)
• Vanguard 529 (No direct state affiliation – https://investor.vanguard.com/529-plan/)

– NY Residents and beyond: Single NY tax filers can reduce their taxable income by $5,000 by making a $5,000 contribution to a NY 529. This amount increases to $10k for those who are married and file jointly.

• BEWARE: While it’s great that NY (like many states) offers a tax deduction, be aware that participants have to choose between “Advisor-Guided Plans” and “Direct Plans” – always opt for the direct plans. Advisor-Guided Plans typically charge just over 5% for every 529 contribution. That is, each time you contribute money to the child’s 529 account, 5% of your contribution (no matter the size) goes directly to a financial salesperson’s pocket.

Don’t let fees drag down the precious funds you are setting aside for the next generation’s continuing education. As always, please feel free to contact our team to discuss this further

*Vanguard’s average 529 expense ratio is .28%
[/et_pb_text]
[/et_pb_column]
[/et_pb_row]
[/et_pb_section]