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Does a Roth IRA Conversion Make Sense for you in 2020?

By | Economy, Investing, Investment Portfolio, SH&J Blog | No Comments

The Roth conversion has been a tool available to financial professionals for a long time to help clients minimize future tax liability. Conversions are helpful in specific instances, but many times are not applicable to every client situation. What about the culmination of events in 2020 has made the Roth conversion more relevant than years past?

What is a Roth Conversion?

Most employees will contribute to a tax-deferred retirement plan while they are working. This comes in many forms: a traditional IRA, a 401(k), a 403(b), etc. These retirement plans provide you with a tax deduction in the year a contribution is made. The funds then grow tax-deferred until it becomes time to make withdrawals. The IRS requires these account types to withdraw a Required Minimum Distribution at age 72 (changed in 2020 from 70 ½). This means you will pay taxes on the original contributions and the investment growth that has accrued over the years.

A Roth conversion is the transferring of retirement funds from a tax-deferred IRA account into a Roth IRA. Roth IRAs differ from the previous listed account types because taxes are paid in the year in that the contribution or conversion takes place. On top of that, the growth on the contributions/conversions is exempt from taxes and there are no mandatory withdrawals during retirement. 

What is the purpose of a Roth Conversion?

There are a few reasons why Roth conversions are a popular financial planning tool. One of the most common reasonings for converting tax-deferred funds to a Roth is to create a tax-free bucket for withdrawals during retirement. Having both tax-deferred and tax-free assets during retirement provides more flexibility when it comes to tax planning and client portfolio distributions for spending.  Roth conversions can also be appealing if you expect to be in a higher marginal tax bracket in retirement than the year you make the conversion. This is rare, but plausible especially in unique circumstances like this year. By strategizing, you may be able to use this tool to make a series of smaller conversions during years with lower tax implications to minimize taxes paid over the long run. 

If you have time on your side, compounding returns on the conversions could benefit you over a long period of investing. On traditional IRA assets, investors pay taxes on investment gains when they withdraw money but with Roth assets, the gains grow tax-free. It is also a tool for investors who would like to leave tax-free assets to their heirs. If that is the case, a Roth conversion may make sense for your situation. 

Why is this a relevant topic in 2020?

This year has been filled with trials and tribulations and we still have half a year ahead of us. From a global pandemic to world-wide protests and heightened discussions regarding race discrimination, the world has seen a great deal of challenges and change in 6 short months. What about this year makes the conversation regarding Roth conversions more relevant than years past? First off, many Americans are going to see less income this year in comparison to prior years. This could be due to losing a job or seeing less customers during the government stay-in-place order. This could also be due to The Cares Act allowing those who are required to take Required Minimum Distributions to skip it for the year 2020, creating less taxable income this year. We are also living during a time of historically low-income tax brackets. With the increase in government spending, unemployment benefits and use of federal resources, we will most likely see increased tax rates in our future. If that is the case, it may make sense to pay taxes this year before they are raised. 

Our team at Sharkey, Howes & Javer is here to help you explore all your financial options. Contact Sharkey, Howes & Javer today to speak with a CERTIFIED FINANCIAL PLANNER™ to see if a Roth conversion makes sense for you in 2020.

Inside the Economy: Catching Up with COVID-19

By | Economic Discussion, Economy, SH&J Blog | No Comments

This week on “Inside the Economy”, Americans have spent the last few months saving more and spending less. As spending begins to resuscitate, where are we seeing inflation in the system? We are starting to see an increase in travelers making their way through TSA but are nowhere near the 2.5 million flyers per day we saw during summer 2019. How are the airlines coping with the slower summer days? Through a volatile market, who are the current winners and losers? Tune in to find out!

Key Takeaways:

  • Initial jobless claims are decreasing in Colorado while some are going back to work— others are still hesitant to spend their hard-earned money
  • The demand for recreation services and outdoor equipment has increased prices 
  • Home sales are picking back up as Americans are staying local
  • Airlines are leaning on CARES Act Support to navigate through hard times
  • The U.S. dollar has been losing strength in conjunction with oil prices and low interest rates


Market Insights and Commentary – Summer 2020

By | SH&J Blog, Stock Market | No Comments

Murphy’s Law: “If Something Can Go Wrong, it Will”

Prince Harry and Duchess Meghan Markle resigned from their duties as senior royals, the tragic death of NBA superstar Kobe Bryant, President Trump’s impeachment trial, “Brexit”, and Iranian conflict all took place within the first 30 days of 2020. How naïve we would become when COVID-19 overshadowed it all. 

The second half of Murphy’s Law says if something can go wrong, it will… and usually at the worst time. This time, the second part of that old adage is not entirely true. 2020 started on the shoulders of a record year. 2019 was a year of incredible global growth and portfolio returns. In this case, it makes sense to revise the second part of Murphy’s Law: “If something can go wrong, it will…and usually all at once. In February, the S&P 500 was overvalued and due for a correction. Then, COVID-19 developed into a global pandemic, halting output and testing healthcare systems. The trifecta was Russia and Saudi Arabia started a price war on oil. Three converging events drove global stock markets into a fast, downward spiral.


S&P Drops in Bear Markets

A Chasm in the Data and Performance

From February 19th to March 23rd the S&P 500 declined 34%. Then, in the next month and a half the index rallied over 30%. The global stock markets continue to climb amidst the worst economic data we have seen in over 100 years. Global Central Banks, governments, and science communities are due most of the credit for the quick recovery. The Federal reserve injected $2 trillion into the economy within weeks and supported credit markets with massive bond purchasing. Governments are financing the smartest minds in science to accelerate finding and mass producing a vaccine. The world has come together, and the markets are betting on a vaccine and a clear path forward by the end of 2020. Can this be the only explanation for why stocks have rallied? Fundamentally, the stock prices are not supported by economic data. 

As state and local economies begin to reopen, some small businesses will not return. With over 35 million jobs lost, many will be permanent. During the economic shut down, many of the small and local businesses lost the battle to large conglomerates such as Target, Wal-Mart, and Amazon. You may find an out of business sign the next time you walk by your favorite shop. This dichotomy between small and large companies is directly represented in the stock market. A handful of the largest companies are carrying the markets higher. Large growth stocks are slightly positive, year to date, at the time of this writing, while small and mid-cap companies are down more than -15%. 

QQQ vs IWM chart

Historically, during recessions, we see a few companies thrive and evolve into clear winners against their competition. We also tend to see more companies restructure or file for bankruptcy. As we progress through this rare time, the gap between winners and losers will likely widen. 

Moving Forward

What will summer 2020 have in store for us? A second wave of COVID-19 cases? Extended shelter at home orders? A successful reopening? A “V” recovery in the stock market? The future is elusive. One thing is certain; we will learn more about the virus and the economic and social impacts of it. Meeting friends at a coffee shop, taking a cruise, going out to eat and office interactions will all look a little different, if they happen at all. As investors we must proceed with caution, while being opportunistic. 2020 still holds a U.S. election. Tensions with China are tighter than ever. The race to a vaccine and its effectiveness are still uncertain. However, we see opportunity in sectors such as global technology companies, healthcare equipment and other evolving markets. The new normal has just started. Hopefully, we can learn from this, evolve and grow into a better world. Maybe we should be asking, how much better will things be a year from now, in 2021? Seems the stock market is becoming more and more optimistic about the future.

Please Note: We will be continuing our Summer Hours by closing the office at 1:00 pm on Fridays through September 4th.  We hope you have a wonderful summer! 

Strategies to Pay Down Student Loans

By | SH&J Blog, Tips | No Comments

College attendance and cost has dramatically increased over the years. It’s no surprise student debt has piled up as well. Finding a job, following your budget, saving for retirement, buying a home, and planning fun experiences is a difficult balancing act after graduating college. In this article we will cover different strategies to pay down debt and key actions you can take to get rid of student loans.

Know what type of loans you have.

Most students will have both subsidized and unsubsidized loans. The government will pay the interest on a subsidized loan while you are in school. If you have unsubsidized loans, the interest will start accruing during your school years. This can result in a much bigger debt balance than you realize when you get out of school. If you do have unsubsidized loans, it can be a good idea to try and pay the interest along the way if you can balance work and school. 

Types of Student Loans

Does refinancing make sense?

Student loan interest rates can be as high as 7% or 8%. If you have good credit and refinancing can save you money in interest over the life of the loan, consolidating your debt may be a good option. This could simplify your debt obligation to one payment and potentially could lower your monthly amount due. The government also has different options like pay as you earn or income-based payment options where you pay more as your income increases. That said, be careful about refinancing Federal loans into private loans as you could lose some of the favorable re-payment options you have with Federal loans. Sometimes, depending on your circumstances, these re-payment options could outweigh the lower interest rate you may get by refinancing. Be sure to confirm your options of consolidating vs. refinancing.

Make extra payments

If you have extra cash flow or receive a tax refund, bonus or raise it may make sense to make an extra payment on your student loans. If you do decide to pay more towards your student loans, make sure it goes to the balance of your loan, not next month’s payment.  We generally recommend paying off your highest interest rate debt first, so if you have credit card debt or other loans at higher interest rates try focusing on paying down those balances first. 

Know your repayment options

Certain career paths or programs could qualify you for student loan forgiveness. Do your research before you stop paying or decide to defer your loans. The government has strict qualifications for loan forgiveness, so make sure you qualify and receive loan forgiveness before you stop making payments. 

Loan Repayment

Consider a 529 plan

With the SECURE Act passing at the end of 2019, there were changes made to 529 plan rules. $10,000 per lifetime can be used from a 529 to pay down student debt. However, make sure to check your state laws. Some states don’t have a state tax deduction for 529 contributions and some states won’t let you use 529 funds towards student loans. 

Always stay on top of your student debt and know your options. If you have questions or need help contact Sharkey, Howes & Javer for a free consultation with one of our CERTIFIED FINANCIAL PLANNER™ professionals. 

Inside the Economy: The New Normal and COVID-19

By | Economic Discussion, Economy, SH&J Blog | No Comments

This week on Inside the Economy, we address the beginning of the end of a great social experiment. Human behaviors have changed and will continue to evolve as businesses and consumers move forward. The S&P 500 continues to separate itself from the grim economic data with positive performance. Why is there such a disconnect? One catalyst may be how quickly the Federal Reserve and Congress acted to maintain liquidity in capital markets. As we adjust to the impact of COVID-19, the markets may start focusing more on other potential volatile events, like what is going on in Hong Kong and an upcoming presidential election. Tune in to hear more!


Inside the Economy: Spending Patterns and Coronavirus

By | Economic Discussion, Economy, SH&J Blog | No Comments

Today on “Inside the Economy with SH&J”, we take a look at where people are investing their hard-earned money. Americans are spending less on their credit cards but are investing in real estate and home improvement projects. While some are purchasing new homes, others are struggling to make their mortgage payments. Will the missed payments have a long-term economic impact? The stock market has made a slow but steady recovery, have we seen the worst of it or is there more volatility to come? Amazon has proven it can weather the storm, but how are other retailers holding up?


Retirement Checklist

By | Income, Investing, Investment Portfolio, Retirement, SH&J Blog, Tips | No Comments

Many of us spend our entire working life preparing for retirement. Whether it’s contributing to retirement accounts, paying down mortgages and debt, acquiring pension years, or paying into Social Security.

As retirement approaches, what steps can you take for a smooth transition?

Take Inventory of your Assets

While you are in the working world, it can be difficult to keep track of all your investments, savings vehicles and bills that you have acquired over time. As you prepare for retirement, it is important to take the time and track down all bank accounts, retirement and brokerage accounts, along with all outstanding debts. Once you have taken a full inventory, create a safe place to store all username and passwords. Potentially share this location with a trusted family member or friend in case of a future emergency. Next, consider consolidating as much as possible. Reduce the number of bank accounts, create a plan for your outstanding 401(k) or 403(b) with work, and minimize debt. This will create a simpler and streamlined transition into retirement.


Prepare Finances

Build a Budget

Do you know how much you are spending on a monthly basis? As you leave the workforce, it is extremely important to have a handle on expenses. Will you spend more on travel during retirement? Will the mortgage be paid off? Creating a monthly budget for retirement will allow you to monitor spending and reduce the risk of spending through your savings.

Social Security

Identify Income Sources

What is your plan for Social Security? Do you have a pension? Do you have annuities? Do you plan on working part time? By determining income sources that will be available, you and your advisor will be able to create a plan for your retirement savings. Between your monthly budget and income sources, you are then able to determine how much you may need each month from your retirement assets in order to make ends meet.

Practice Retirement

This is the fun part! Retirement is a major life transition. You now have plenty of free time which was once filled with commutes, hours at work and mingling with colleagues. So, as you prepare for retirement, start practicing for it! Set lunch dates with old friends, try out different hobbies, start learning how to enjoy free time again and shaping the retirement that you have worked so hard for.

Know Your Health Insurance Plan

It is important to have a health insurance plan in place before retirement. Can you continue a health care plan through a past employer? Have you signed up for Medicare? Which supplements may be beneficial to your situation? If you are retiring before age 65, how do you plan to cover health care insurance before Medicare kicks in? These are all important questions to answer as you create your retirement plan.

Review Estate Plans

Retirement is a great time to evaluate estate plans and make sure they are in line with your current wishes. Provide copies to a trusted family member and/or your financial advisor so that others have access to them, just in case. Also, check in on your investment account and outstanding life insurance policies to make sure beneficiaries are up to date.

Real Estate Strategy

Do you plan to stay in your home long-term? Would a retirement community be more conducive to the lifestyle you would like to live? Do you need to refinance or acquire a Home Equity Line of Credit (HELOC)? Refinancing and nailing down a HELOC are easier to do while you still have an income, so this is a great time to talk about your options with your financial advisor. 

Establish Retirement Investment Allocation

The transition into retirement comes with a great deal of changes. One of these changes is moving from the accumulation phase or saving for retirement to the distribution phase or pulling from your retirement savings. This is a huge shift in mindset. During this time, your risk tolerance may not change, but you may see an increased need for cash or liquidity. That is why it is important to talk with your financial advisor and develop a transition plan for your investments.

Real Estate

Get Excited!

Take a deep breath! You are almost there! Many people work hard their whole life to make it to retirement. Congratulations!

Our team at Sharkey, Howes & Javer is here to help you every step of the way on the road to retirement and beyond. Contact Sharkey, Howes & Javer today to speak with a CERTIFIED FINANCIAL PLANNER™ about your own retirement journey.

Inside the Economy: Bleak Economic Data and COVID-19

By | Economic Discussion, Economy, SH&J Blog | No Comments

This week on Inside the Economy, we begin to see the economic impact of COVID-19 in the numbers. No surprise, unemployment claims have surged. The next question we need to address is how long will people stay unemployed? The first quarter GDP readings contracted -4.8%, the most since 2008. More than likely, second quarter GDP will decline further, but the U.S. is doing relatively well compared to other countries economic decline. With earnings season wrapping up, health care, consumer staples and technology reported better than expected while other sectors struggled. Tune in to hear more!


ETFs vs Mutual Funds | Why one over the other?

By | Investing, Investment Portfolio, SH&J Blog, Stock Market | No Comments

History of Funds

Humans have been investing for thousands of years, but the idea of “diversification” and pooling resources to spread risk is relatively new. The first modern day mutual fund in the U.S. was created in the 1920s. It was a way for investors to diversify their investment holdings with little capital. However, it wasn’t until the 1950s and 1960s that the mutual fund industry started to take off.

Prior to 1971, all mutual funds were “active”, meaning the investment manager could choose whatever stocks and bonds he or she saw fit. In 1971, Wells Fargo established the first index fund, which was built to replicate a certain index, not outperform it. It was a revolutionary concept that John Bogle mastered to build the largest mutual fund company of all time, Vanguard.

investment chart review

As indexing gained popularity, the first Exchange Traded Fund (ETF) was created in the late 1980s. The first ETFs were low-cost index funds that gave investors the ability to access cheap market exposure. The ETF industry has seen exponential growth since the Great Financial Crisis in 2008. Currently, there are over 5,000 ETFs that investors can trade, compared to roughly 1,000 ETFs in 2009. One of the most well-known ETFs, the S&P 500 Trust ETF (SPY), was created in 1993 and now has over $260 billion in assets.

Differences between ETFs and Mutual Funds

Why would someone invest in an ETF vs a mutual fund or vice versa? While there are many similarities between the two investment vehicles, there are a few key differences.

One of the key differences is how they trade. ETFs trade intra-day, just like a stock. This means that if you put in an order to buy an ETF, you have possession of the ETF as soon as the trade executes. A mutual fund trade will execute at the end of the day. At the end of the trading day, all the underlying holdings are priced, which then allows the mutual fund to be accurately priced. Therefore, you can only buy or sell a mutual fund at the end of the day, once the price is known. 

The vast majority of mutual funds are actively managed, meaning there is a manager making buy and sell decisions. Their goal is to purchase investments that may outperform the index in that asset class. Active management can be beneficial in inefficient markets, like bonds and international stocks, because a manager can identify opportunities and weaknesses. Most ETFs are passive index funds. Because mutual funds are more active, they typically have higher internal expense ratios than ETFs. ETFs are generally more tax efficient as well. If an ETF is an index fund, the turnover of the underlying funds is usually less than an actively managed mutual fund. This can cause ETFs to generate less capital gains distributions compared to a mutual fund.

At Sharkey, Howes, & Javer, we use a combination of mutual funds and ETFs. In certain markets, such as international stocks and bonds, we believe an active mutual fund manager can at times add value above and beyond the benchmark index. In more efficient markets like U.S. large companies, we think investing in ETFs provides a lower cost of entry to the stock market. Learn more about mutual funds and ETFs and how to implement them in your portfolio by getting in touch with us today for a complimentary consultation with a CERTIFIED FINANCIAL PLANNER™.  

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Inside the Economy: COVID-19 and the Economic Interruption

By | Economic Discussion, Economy, SH&J Blog | No Comments

This week on Inside the Economy, we continue to talk about the impact COVID-19 is having on the global economy. The U.S. government has interrupted the momentum of the economy asking American people to stay home. The U.S. has already injected liquidity of approximately 11% of GDP into the system. What will the final cost be? As some states gear up to start reopening certain parts of the economy, one thing is certain, there will be clear winners and losers. Tune in to hear more!