Dear Legacy Wealth Alliance Family,
We are now one month past the halfway mark into 2021 and have noticed a trend in topics that have dominated the financial news media and our client conversations so far this year. These topics include:
- Will inflation persist long-term?
- When will the Fed raise interest rates?
- How might potential changes to the tax code affect me?
- What investment style will outperform the markets this year: Growth or Value?
As these are hot topics, we’d like to highlight what we are hearing on each in the event it may apply to you.
As U.S. consumer prices continue to rise during the economies reopening following the COVID-19 recession, supply chains are struggling to keep up with the expanding demand. The consumer price index (CPI) has increased by 5.4% over the 12-month trailing period through the end of June 30th. This is the largest increase in more than 12 years per the U.S. Bureau of Labor Statistics. Inflation has accelerated sharply in the goods sector, where manufacturers have struggled to meet the surge in demand, especially for motor vehicles and consumer electronics. If you have been holding onto an old vehicle in hopes of a better time to sell, wait no further. We are hearing stories from clients who have sold their used vehicles for thousands of dollars more than their original purchase price due to the lack of supply of automobiles.
The Federal Reserve is currently taking the stance the acceleration in prices will be temporary, with inflation slowing in 2022 and 2023. But inflationary pressures have normally ramped up as the business cycle ages leading to more supply constraints. It is also unusual for inflation to slow as employment rises and economic output increases. History suggests inflationary pressures are likely to ease if the overall economic recovery threatens to stall or slow down. If the U.S. economy avoids both into 2023, inflation could accelerate further and necessitate a tightening of monetary policy earlier than the Fed has indicated.
Another hot topic this year is the proposed changes to the current tax law that the Biden administration has announced. Some of the key takeaways from the proposed tax law changes that would directly impact individuals and households include:
- The top individual federal income tax rate increasing from 37% to 39.6%.
- Taxpayers with incomes over $1 million would pay 43.4% on capital gains tax.
- The step-up in basis for non-qualified accounts upon death would be eliminated.
- Reducing the gift and estate tax exemption from $11.7M to between $3M to $5M.
- Extending the refundable child tax credit increase from $2,000 per child to $3,600 for children under 6 and $3,000 for children 6 through 17 through 2025.
We feel now is the time to begin preparing your plan of action for these changes so they can be implemented in short order if necessary. Here are some of the strategies to consider preparing for:
- Utilize tax diversified accounts such as Roth IRAs, annuities, 529s and HSAs.
- Consider increasing contributions to 401(k)s, IRAs, Defined Benefit Plans and Roth accounts.
- Consider funding life insurance with distributions from your IRA.
- Take advantage of a low-income year to take additional IRA distributions or sell appreciated stock.
- Consider drawing down large traditional IRA balances in lower income years and paying taxes on the IRA monies now.
- Consider annual partial Roth conversions.
- Leverage property and investments by borrowing against appreciated property and lending back instead of taking withdrawals creating taxable events.
- Consider obtaining life insurance to create estate liquidity and tax payments.
- Consider accelerating sales and income into 2021, buy and hold positions, tax-loss harvesting, and other tax efficient investment strategies
- Consider tax basis management during your lifetime.
- Evaluate assets to be left to beneficiaries and determine if certain assets make more sense than others based on potential taxation.
- Consider leaving Roth (after-tax) retirement assets to non-spouse beneficiaries.
- Consider multiple beneficiaries for IRA accounts, or whether IRAs should be left to lower tax beneficiaries.
- Consider gifting or transferring assets out of your estate when interest rates and asset values are low.
- Instead of leaving highly appreciated assets to the children so they could get the step-up in basis, leave highly appreciated assets to your spouse, and leave assets with little appreciation to the children.
- Instead of holding until death, gift assets sooner, before they appreciate too much in value.
- Use it or lose it! Use the large gift exemption now as the IRS announced at the end of 2020 that there would be no retroactive tax on gifts made using the exemption in prior years should the exemption be reduced.
- Gift before estate tax laws change to prevent any planning mistakes or challenges that can come if you are forced to rush the process.
- Those that are charitably inclined may want to gift highly appreciated assets to charity.
- Consider charitable beneficiaries, including a charitable remainder trust if you are so inclined.
Now onto the growth versus value question. Moving into the last five months of 2021, the growth vs. value race is heating up. Through July 30th, the Russell 3000 Growth Index was up 15.4% YTD, and the Russell 3000 Value Index was up 16.9% YTD per Yahoo Finance. What makes the closeness of these returns even more interesting is that at the beginning of May, the Value Index was outperforming the Growth Index by nearly 17%. At that time, many analysts thought the global recovery would run longer and hotter, and bond yields would continue to move higher. Both dynamics favor economically sensitive value stocks. Then, as we moved further through Q2, growth stocks came roaring back as investors grew concerned about the durability of the expansion, and the Delta variant of COVID-19 only added to the economic recovery worries as of late. At Legacy Wealth Alliance we continue to maintain a balanced position between growth and value in our managed portfolios, relying on the fund managers of the strategies we use to navigate that style dynamic and find the most compelling opportunities at the individual stock level. Ultimately, the factors continuing to influence the trajectory of growth and value stocks – the pace and durability of the economic recovery, the persistency of inflation, the direction of bond yields, and investor’s reaction to changes to the tax code – will heavily influence the direction of monetary and fiscal policy into the end of the year.
In other news we are sad to inform you that this will be the final week of Henry Nelson’s internship with Legacy Wealth Alliance. Any of you that met Henry or communicated with him during this summer know how professional Henry, is and what a great asset he has been for us during his short but fulfilling time at Legacy. We wish Henry all the best success as he returns to Georgetown University for his second year.
We look forward to continuing our relationship with each of you moving forward.
8950 S. 52nd Street, Ste. 204
Tempe, Arizona 85284
- S. Bureau of Labor – Federal Reserve.gov.
This information does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may view this information. Statements, opinions, and forecasts made represent a particular observation and assessment of the market environment at a specific point in time and are not intended to be a forecast of future events or a guarantee of future results. Investors should seek financial advice regarding the appropriateness of investing in any securities or investment strategies discussed or recommended. Statements regarding future prospects
may not be realized and may differ materially from actual events or results. Past performance is not indicative of future performance.
Please do not send any trading or transaction instructions through this email as they will not be executed. If you need to place a trade, please contact our office directly or the Trading Desk at 800-237-3813. Investments and Advisory Services are offered through representatives of Lincoln Financial Securities Corporation (LFSC), member SIPC. Insurance is offered through Legacy Wealth Alliance, located at 8950 South 52nd Street, Ste 204 Tempe, AZ 85284. Lincoln Financial Securities Corporation and Legacy Wealth Alliance are not affiliated.