Market Turbulence – Rates and Russia

The return of market turbulence, heightened volatility, and geopolitical uncertainty have dominated the investment landscape as we begin the year 2022. Stocks and bonds alike are firmly in negative territory for the year, while the VIX (volatility index), has nearly doubled and the bond market’s companion measure of volatility, the MOVE index, has doubled from mid-2021 lows. As we discuss the primary drivers behind these recent market movements, we want to highlight the fact these types of pullbacks and the volatility associated with them are normal, considered healthy, and expected to occur from time to time.

Russia and Ukraine

For the past several months, Russian troops have been aggregating along the border in Ukraine. Recently, President Putin gave an ultimatum, stating Russia will back down once Ukraine gives up sovereignty, demanding Ukraine does not join NATO. He does not like the idea of NATO being on Russia’s borders. The fact countries are beginning to align to the West is seen as a threat, and in Putin’s eyes, Ukraine joining NATO is not an option. On Monday, Putin ordered troops into two breakaway regions of eastern Ukraine, undermining hopes of a diplomatic resolution with the West. In response, President Joe Biden recognized that Russia has begun “an invasion” of Ukraine, and he announced sweeping sanctions on the major Russian bank VEB and its military bank. Biden also announced sanctions on Russia’s sovereign debt, which will effectively prohibit Russia from raising money from the West. In addition, the Biden administration sanctioned three individuals with ties to members of Putin’s “inner circle”. If the situation continues to escalate, we could see further sanctions such as export controls restricting countries from selling products with U.S. content to Russia, along with blocking Russia from transacting in the SWIFT (Society for Worldwide Interbank Financial Telecommunications) payments platform.

A full-scale Russian invasion of Ukraine likely would cause serious disruptions to global energy markets. Russia is a huge raw material provider. Russia supplies 30-40% of Europe’s natural gas. In the broad commodities market, it supplies ~10% of the aluminum and copper and produces 43% of palladium. It also is the largest exporter of wheat and the second-largest exporter of oil. Recently, Germany halted the approval of the Nord Stream2 pipeline between Russia and Germany. Both countries are ultimately reliant on each other. Germany needs gas, and the pipeline itself would be worth billions to the Russian economy. Russia is a core part of energy markets, and any sort of sanctions will end up disturbing those flows.

Rates – The Fed & Inflation

Against the backdrop of strong economic growth, a robust labor market, and higher inflation, the Federal Reserve has adopted a much more hawkish tone in recent months. Inflation in the economy continues to run hot, with January’s headline inflation increasing to a 40-year high of 7.5%. Just last month, markets were implying between 4-5 rate hikes over the course of 2022. As of now, some are anticipating as many as 6-7 rate hikes between now and the end of the year. Shorter-term yields, which are very responsive to shifts in Fed policy, have risen much more than longer-term yields. This suggests more aggressive tightening early on, shifting to a more gradual pace as inflation cools. What’s important to note, however, is most Fed officials have pointed toward a steadier approach to higher rates. This leads us to believe the first increase in the federal funds rate in March will likely be 0.25% rather than 0.50%. If the Federal Reserve can facilitate a soft landing, the economy expansion is likely to continue, albeit at a slower pace.

The Global Economic Backdrop

COVID is winding down, geopolitical tensions are high, and monetary policy is in for a major shift. Despite these challenges, economic and financial system fundamentals are sound. On economic growth, last week’s January retail sales report suggested the Omicron wave had much less of an impact on the economy as initially feared. We expect this week’s GDP report to show a strong growth rate for the fourth quarter of 2021. In addition, as the pandemic continues to fade, we expect real GDP growth to remain strong as the services sector rebounds. Furthermore, inflation is likely to be a positive for stocks, particularly those with pricing power in industries like commodities and materials. Internationally, the UK and France recently reported their strongest economic growth in eight months, with their composite purchasing managers index rising to 60.2 and 57.4, respectively. Meanwhile, Germany had its best growth in six months, and Europe’s manufacturing lead times fell, a key sign that supply chain bottlenecks are starting to wane (JPMorgan).

The Bottom Line

The investment implications of the gathering storm in Ukraine depends largely on how far the Russian president is willing to escalate the crisis. For investors, it is important to note Ukraine tensions are a low earnings risk for U.S. corporations. Regardless of the negative impact Putin’s decisions will have on the people of Ukraine or the long-term negative results he simultaneously inflicts on his own country, the world economy will heal. Despite all that has gone on in the world over the past two years, and all that could yet transpire in 2022, markets continue to remain resilient. Overreacting to short-term market movement by panicking in the face of volatility is one of the biggest mistakes that investors often make. Investing in a diversified portfolio consistent with your objectives and risk tolerance is designed to help you reach your longer-term goals while smoothing the ride along the way. This is the best defense against our expectations for elevated volatility ahead. Time and time again the market has rewarded investors with long-term, disciplined approaches – this time will be no different.

Disclaimer
Investment advisory services are offered through Avantax Planning Partners^SM. Commission-based securities products are offered through Avantax Investment Services^SM, Member FINRA, SIPC. Insurance services offered through licensed agents of Avantax Planning Partners. 3200 Olympus Blvd., Suite 100, Dallas, TX 75019. The Avantax entities are independent of and unrelated to Yeo & Yeo Wealth Management. Peter Bender is an Avantax registered representative. Not all Financial Professionals are licensed to offer all products or services. Financial planning and investment advisory services require separate licenses. Avantax affiliated advisors may only conduct business with residents of the states for which they are properly registered. Please note that not all of the investments and services mentioned are available in every state.

This material is for informational purposes only. It is not intended as investment, tax or other advice or an offer or solicitation for the purchase or sale of any financial instrument. Indices are unmanaged, represent past performance, do not incur fees or expenses, and cannot be invested into directly. Past performance is no guarantee of future results. Consult with your financial, tax or other appropriate advisors on all matters pertaining to financial, accounting or tax obligations and requirements.

Check the background of Pete Bender on FINRA’s BrokerCheck.

Yeo & Yeo is pleased to welcome Matthew Cash, CFP^®, as a financial planning consultant through Avantax Planning Partners^SM.

In collaboration with Yeo & Yeo Wealth Management, Cash provides integrated planning and investment strategies for growing and protecting individuals’ and business clients’ wealth. He designs personalized wealth management solutions by bringing together estate planning, risk management, and retirement planning. Additionally, he supports business owners by reviewing their company retirement plans and optimizing them for tax efficiency, and assisting with business transition strategies. His focus is based on each client’s unique objectives and priorities.

“We are excited to welcome Matt,” said Pete Bender, CPA, CFP^®, Principal and Yeo & Yeo Wealth Management leader. “He is a great addition to Avantax and Yeo & Yeo Wealth Management. His expertise allows us to continue to expand the range of wealth management and financial planning services that we can offer to our clients.”

Cash is a registered representative with Avantax Investment Services^SM and a licensed health, accident, life and variable annuity agent. He holds a Bachelor of Arts in Economics from Ohio State University. He is a CERTIFIED FINANCIAL PLANNER™ and has FINRA Series 7, 63, 65, 9 and 10 securities licenses.

Yeo & Yeo Wealth Management works closely with Avantax, a pioneer in tax-smart investing, financial planning and wealth management, to provide a comprehensive approach to financial planning. Using a unique tax-focused perspective, Yeo & Yeo Wealth Management’s experienced financial planners develop strategies to help clients meet their overall financial goals and desired lifestyle for today and tomorrow.

Avantax WM Holdings^SM is the holding company for the group of companies providing financial services under the Avantax^® name. Investment advisory services are offered through Avantax Planning Partners^SM. Commission-based securities products are offered through Avantax Investment Services^SM, Member FINRA, SIPC. Insurance services offered through licensed agents of Avantax Planning Partners. 3200 Olympus Blvd., Suite 100, Dallas, TX 75019. The Avantax entities are independent of and unrelated to Yeo & Yeo Wealth Management. Although Avantax does not provide or supervise tax or accounting services, our Financial Professionals may offer these services through their independent outside business. Not all Financial Professionals are licensed to offer all products or services. Financial planning and investment advisory services require separate licenses.

Yeo & Yeo Wealth Management is pleased to announce that Peter Bender, CPA, CFP^®, was appointed to the Avantax Planning Partners^SM Advisory Council.

The Avantax Planning Partners^SM Advisory Council is a group of leaders who meet periodically to provide feedback and hear about new wealth management initiatives from Avantax, including strategy, best practices and client experience. The council is made up of individually selected leaders from Avantax Planning Partners’ affiliate firms. Bender was selected for the leadership skills and unique perspective he provides to Yeo & Yeo Wealth Management and Avantax.

Bender is the managing principal of Yeo & Yeo’s Saginaw office and leads the firm’s wealth management services. He is a member of the firm’s Agribusiness Services Group and the Estate Planning Group. He has 30 years of experience in auditing, financial planning and tax planning and preparation for businesses and individuals with a focus on family business.

Bender holds the CERTIFIED FINANCIAL PLANNER™ designation and is a member of the Financial Planning Association. In the community, Bender serves on the board of directors for Wellspring Lutheran Services and is treasurer of the Camp Rotary Foundation. He also serves on the St. Lorenz Foundation Finance Committee and the Valley Lutheran High School Growing Campaign Cabinet.

Avantax WM Holdings^SM is the holding company for the group of companies providing financial services under the Avantax^SM name. Investment advisory services are offered through Avantax Planning Partners^SM. Commission-based securities products are offered through Avantax Investment Services^SM, Member FINRA, SIPC. Insurance services offered through licensed agents of Avantax Planning Partners. 3200 Olympus Blvd., Suite 100, Dallas, TX 75019. The Avantax entities are independent of and unrelated to Yeo & Yeo Wealth Management. Although Avantax does not provide or supervise tax or accounting services, our Financial Professionals may offer these services through their independent outside business. Not all Financial Professionals are licensed to offer all products or services. Financial planning and investment advisory services require separate licenses.

Yeo & Yeo Wealth Management was recognized for the second consecutive year as a Top Wealth Advisory Firm in the large firm division* by Avantax Planning Partners^SM (Avantax). The award honors firms that go above and beyond to help businesses and families achieve their wealth management goals.

Managing principal and wealth management leader Peter Bender CPA, CFP^® said the award acknowledges Yeo & Yeo Wealth Management’s commitment to clients.

“Combining the accounting experience of Yeo & Yeo and the wealth management experience of Avantax provides a distinct advantage,” Bender said. “Together, we help clients see their entire financial picture and create plans to achieve their long- and short-term goals. We are committed to exceeding client expectations in all aspects of wealth management, from financial and retirement planning to asset management.”

Awards were presented on May 26, 2021, at the Avantax Elevate Annual Conference in Des Moines, Iowa.

*Award(s) are neither representative of any client’s experience nor indicative of future performance.

Do you picture yourself owning a new home, starting a business, or retiring comfortably? These are a few goals that may be important to you, and each comes with a price tag attached. That’s where financial planning comes in. Financial planning can help you achieve your goals by evaluating your whole financial picture, then outlining strategies tailored to your individual needs and available resources.

Why is financial planning important?

A comprehensive plan serves as a framework for organizing the pieces of your financial picture. With a financial plan in place, you can focus on your goals and what it will take to reach them. One main benefit is that it can help you balance competing priorities. For example, how saving for your children’s college education might impact your ability to save for retirement. You can use this information to decide how to prioritize your goals, implement specific strategies, and choose suitable products or services. Best of all, you’ll know your financial life is headed in the right direction.

The financial planning process

Creating and implementing a comprehensive plan involves working with financial professionals to:

Develop a clear picture of your financial situation by reviewing your income, assets, and liabilities, and evaluating your insurance coverage, investment portfolio, tax exposure, and estate plan
Establish and prioritize financial goals and time frames for achieving these goals
Implement strategies to address current financial weaknesses and build on your financial strengths
Choose specific products and services tailored to help meet your financial objectives
Monitor your plan, making adjustments as your goals, time frames, or circumstances change

Why can’t I do it myself?

You can, if you have enough time and knowledge, but developing a comprehensive plan can require expertise in several areas. Much like deciding to fix your own car, it’s possible, but it might be better to rely on a professional. An Avantax financial planning consultant can give you objective information and help you weigh your alternatives, saving you time, and ensuring that all angles of your financial picture are covered.

Staying on track

The financial planning process doesn’t end once your initial plan has been created. You should generally review it at least once a year to make sure that it’s up to date. It’s also likely you’ll need to make modifications due to changes in your circumstances or the economy. Here are some events that could trigger a review:

Your goals or time horizon changes
You have a life-changing event like marriage, the birth of a child, health problems, or a job loss
Your portfolio hasn’t performed as expected
You have a specific or immediate financial planning need (e.g., drafting a will, managing a distribution from a retirement account, or paying long-term care expenses)
Your income or expenses substantially increase or decrease
You’re affected by changes to the economy or tax laws

Common questions about financial planning

What if I’m too busy?
Don’t wait until you’re in the midst of a financial crisis before beginning the planning process. The sooner you start, the more options you may have.

Is the financial planning process complicated?
Each financial plan is tailored to the needs of the individual, so how complicated the process will depend on your unique circumstances. But no matter what type of help you need, a financial professional will work hard to answer all your questions and make the process as easy as possible.

What if my spouse and I disagree?
A financial professional is trained to listen to your concerns, identify underlying issues, and help you find common ground.

Can I still control my own finances?
Generally, financial planning professionals make recommendations, not decisions. You retain control over your finances. Recommendations will be based on your needs, values, goals, and time frames. You decide which recommendations to follow, then work with a financial professional to
implement them.

Although planning is needed to help build the biggest possible nest egg in your traditional IRA (including a SEP-IRA and SIMPLE-IRA), it’s even more critical that you plan for withdrawals from these tax-deferred retirement vehicles. There are three areas where knowing the fine points of the IRA distribution rules can make a big difference in how much you and your family will keep after taxes:

Early distributions. What if you need to take money out of a traditional IRA before age 59½? For example, you may need money to pay your child’s education expenses, make a down payment on a new home or meet necessary living expenses if you retire early. In these cases, any distribution to you will be fully taxable (unless nondeductible contributions were made, in which case part of each payout will be tax-free). In addition, distributions before age 59½ may also be subject to a 10% penalty tax. However, there are several ways that the penalty tax (but not the regular income tax) can be avoided, including a method that’s tailor-made for individuals who retire early and need to draw cash from their traditional IRAs to supplement other income.

Naming beneficiaries. The decision concerning who you want to designate as the beneficiary of your traditional IRA is critically important. This decision affects the minimum amounts you must generally withdraw from the IRA when you reach age 72, who will get what remains in the account at your death, and how that IRA balance can be paid out. What’s more, a periodic review of the individual(s) you’ve named as IRA beneficiaries is vital. This helps assure that your overall estate planning objectives will be achieved considering changes in your IRAs’ performance, as well as in your personal, financial and family situation.

Required minimum distributions (RMDs). Once you attain age 72, distributions from your traditional IRAs must begin. If you don’t withdraw the minimum amount each year, you may have to pay a 50% penalty tax on what should have been paid out — but wasn’t. However, for 2020, the CARES Act suspended the RMD rules — including those for inherited accounts — so you don’t have to take distributions this year if you don’t want to. Beginning in 2021, the RMD rules will kick back in unless Congress takes further action. In planning for required distributions, your income needs must be weighed against the desirable goal of keeping the IRA’s tax shelter going for as long as possible for both yourself and your beneficiaries.

Traditional versus Roth

It may seem easier to put money into a traditional IRA than to take it out. This is one area where guidance is essential, and we can assist you and your family. Contact Yeo & Yeo Wealth Management to review your traditional IRAs and analyze other aspects of your retirement planning. We can also discuss whether you can benefit from a Roth IRA, which operates under a different set of rules than traditional IRAs.

Disclaimer
Investment advisory services are offered through HK Financial Services, Inc. (HKFS). Commission-based securities products are offered through Avantax Investment Services^SM, Member FINRA, SIPC. HKFS and Avantax are independent of and unrelated to Yeo & Yeo Wealth Management. Neither HKFS nor Avantax provide tax, accounting or legal services.

In March 2020, Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which included several provisions designed to help retirement savers cope with the financial fallout from the pandemic. Among these temporary measures were special rules for required minimum distributions, coronavirus-related distributions, and retirement plan loans. In late June, the IRS released Notices 2020-50 and 2020-51, which clarify many of the details for both retirement plan participants and sponsors. Following are some important details for plan sponsors to consider.

Required Minimum Distributions (RMDs)

One CARES Act provision allows the suspension of 2020 RMDs from defined contribution plans and IRAs. Plan participants who prefer to forgo RMDs from their accounts, or to withdraw a lower amount than required, may do so. The waiver also applies to account holders who turned 70½ in 2019 and would have had to take their first RMD by April 1, 2020 (unless they actually took their first RMD in 2019), as well as beneficiaries of inherited accounts and those whose required beginning date is April 1, 2021.

For participants who may have taken an RMD before the CARES Act took effect, the IRS has clarified that all 2020 RMDs — even those received as early as January 1 — may be rolled back into a qualified account by August 31, 2020. Moreover, such a rollover would not be subject to the one-rollover-per-year rule.

This ability to undo a 2020 RMD also applies to beneficiaries who would otherwise be ineligible to carry out a rollover. (However, in their case, the money must be rolled back into the original account.)

This provision does not apply to defined benefit plans.

An appendix to IRS Notice 2020-51 includes a sample plan amendment that offers participants and beneficiaries the choice between receiving and not receiving RMDs.

According to the IRS Notice, the sample amendment follows the design of pre-approved plans that utilize a “basic plan document” and an “adoption agreement.” Employers that don’t use an adoption agreement (such as those with individually designed plans) “should modify the format of the amendment to incorporate the desired options in the terms of the amendment.”

The sample amendment offers two optional defaults if participants or beneficiaries do not make an election with regard to RMDs. The first default states that, in the absence of an election, the plan would “pay out distributions that include 2020 RMDs.” The second option states that the default would “suspend distributions that include 2020 RMDs.” A sponsor must select one of these two options and specify the date when the plan will begin operating according to the new terms.

The amendment also offers plan sponsors three different options for direct rollovers associated with RMDs. (If a sponsor does not choose one of the options, the default is that a direct-rollover option applies only to pre-CARES Act eligible rollover distributions.) The direct rollover options are:

2020 RMDs (as defined by the plan)
2020 RMDs and extended 2020 RMDs (both as defined by the plan)
RMDs (as defined by the plan) but only if paid with an additional amount that is an eligible rollover distribution

The CARES Act allows a plan to operate in accordance with an expected amendment, provided that amendment is adopted no later than the last day of the plan year beginning in 2022 (or 2024 for a governmental plan).

Coronavirus-related Withdrawals

Another measure in the CARES Act allows “qualified” retirement plan participants to take one or more plan distributions during the 2020 calendar year totaling no more than $100,000 of their vested balance without having to pay the 10% early-withdrawal penalty (25% for certain SIMPLE IRAs). There is no mandatory tax withholding on these distributions, and qualified individuals can take distributions regardless of actual need.

Participants may choose to spread the income from these coronavirus-related distributions (CRDs) ratably over a period of three years to help manage the associated income tax liability. They may also recontribute any portion of the distribution that would otherwise qualify for a tax-free rollover to an eligible retirement plan over a three-year period, and the amounts repaid would be treated as a trustee-to-trustee transfer, avoiding tax consequences.¹

Amounts can be recontributed at any point during the three-year period, beginning the day after the day of a CRD. Amounts recontributed will not apply to the one-rollover-per-year rule.

Participants will report a coronavirus-related distribution (or distributions) on their federal income tax returns and on Form 8915-E, Qualified 2020 Disaster Retirement Plan Distributions and Repayments. They can also use this form to report any recontributed amounts.

For the purposes of Section 409A nonqualified deferred compensation (NQDC) plans, IRS Notice 2020-50 clarifies that CRDs will be considered hardship distributions. NQDC plans may therefore be amended to indicate that a CRD would result in the cancellation of deferrals for 2020.

The Notice also states that CRD amounts should be reported on Form 1099-R and provides relevant details.

Coronavirus-related Loans

The CARES Act also included two provisions that apply to plan loans. First, between March 27 and September 22, 2020, “qualified” retirement plan participants may also be able to borrow up to 100% of their vested account balance or $100,000, whichever is less. And second, any qualified participant with an outstanding loan who has payments due between March 27, 2020, and December 31, 2020, may be able to delay those payments by one year.

Participants who delay their payments should understand that once the delay period ends, their loan payments will be recalculated to include interest that accrued over the time frame and reamortized over a period up to one year longer than the original term of the loan.

IRS Notice 2020-50 provides a safe harbor for employers implementing the delay of loan repayments.

Who Is Considered “Qualified”?

In the CARES Act, “qualified individuals” were originally defined as account holders who were diagnosed with the coronavirus, those whose spouses or dependents were diagnosed with the illness, and those who experienced certain adverse financial consequences as a result of the pandemic. IRS Notice 2020-50 expanded that definition to include a participant, spouse, or household member (defined as a person who shares the participant’s principal residence) who has experienced pandemic-related financial setbacks as a result of:

A quarantine, furlough, layoff, or reduced work hours
An inability to work due to lack of childcare
Owning a business forced to close or reduce hours
Reduced pay or self-employment income
A rescinded job offer or delayed start date for a job

Employers that have added coronavirus-related relief options to their plans prior to release of IRS Notice 2020-50 should ensure that they notify employees of the expanded eligibility.

Employers can rely on an employee’s self-certification that he or she is a qualified individual for the purposes of the loan or withdrawal provisions, unless, of course, a plan administrator has “actual knowledge to the contrary.” The Notice includes details about what “actual knowledge” means and includes a sample self-certification statement.

Adoption of the Provisions

Plan sponsors are not required to adopt the CARES Act loan and withdrawal provisions. If they choose to do so, as with the RMD provision, sponsors have until the last day of the plan year beginning in 2022 (or 2024 for a governmental plan) to adopt amendments.

If a plan chooses not to adopt the CRD provision, sponsors should note that qualified participants may still choose to categorize certain other types of distributions — including distributions that in any other year would be considered RMDs — as CRDs on their tax returns, as long as the total amount does not exceed $100,000.²

For more information, review IRS Notices 2020-50 and 2020-51, and speak with your Yeo & Yeo tax advisor.

¹Qualified beneficiaries may also treat a distribution as a CRD; however, nonspousal beneficiaries are not permitted to recontribute funds, as they would not otherwise be eligible for a rollover.

²Notice 2020-50 specifies the types of distributions that are not eligible for the special tax treatment.

Investment advisory services offered through HK Financial Services (HKFS), an Independent Registered Investment Adviser. Commission-based securities products are sold by ProEquities registered representatives and offered through ProEquities, Inc., a Registered Broker-Dealer and Member FINRA and SIPC. HKFS, ProEquities, and Yeo & Yeo Wealth Management are unrelated entities. Neither HKFS nor ProEquities offer accounting, tax or legal services.

The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019, an expansive law that went into effect January 1, 2020, expands retirement savings opportunities to more people and accelerates tax revenues as a means to pay for the proposed changes. The elimination of the stretch provision for inherited Roth and traditional IRAs is among one of the significant changes to inheritance planning as a result of the SECURE Act.

The new law effectively eliminates the stretch IRA for inherited (non-spouse) IRA beneficiaries. Non-spouse IRA beneficiaries will be required to fully distribute the IRA to themselves by the end of the tenth year following the IRA owner’s death. The inherited IRA required distribution rules also apply to inherited Roth IRAs. While there is no tax on Roth distributions, the required ten-year distribution period will significantly reduce the tax-free growth the stretch would have allowed.

This change will also impact those who have named a conduit trust (most likely a revocable trust) as their traditional IRA beneficiary with the stipulation that the “look through” named beneficiary take RMDs from the inherited IRA. Under the SECURE Act, the only required distribution takes place in year 10 when the entire account must be distributed to the “look through” beneficiary.

There are several strategies that individuals can use to help offset the tax law changes such as Roth IRA conversion, life insurance, fund an irrevocable living trust, and make charitable contributions. Of the options, life insurance can be one of the most effective tools.

As an alternative to the stretch IRA, the IRA owner could utilize distributions from their IRA to fund a life insurance policy that would provide a tax-free inheritance to their beneficiaries. This could allow taxpayers to pay the tax on their IRA now at lower rates than their heirs would have to pay later in income and estate taxes. As an added benefit, the money in life insurance can grow tax-free and the proceeds from the policy would never be taxed.

Consider an example of utilizing life insurance as an alternative to stretch IRAs for a couple, both age 65 that have a desire to pass the value of their IRA to their children.

IRA Balance: $1,000,000
Annual IRA Withdrawals: $43,000
Net After-tax Withdrawals (24% Tax): $30,000

For this example, let’s assume the couple does not need the full $30,000 net distributions for their normal living expenses and therefore used the money to fund a survivorship life insurance policy each year with a guaranteed tax-free death benefit of $1,868,840. The benefit of the survivorship life insurance policy is significantly more than the $1,000,000 IRA, minus taxes that their children would inherit. Also, there could still be money left in the IRA during their lifetime for other purposes. Assuming they both pass away at the age of 87, the IRA account will still have a value of $740,000* that they could pass to their children or use for other purposes.

For charitably inclined clients, there can be additional benefits of this strategy. The original IRA, less the amounts taken out to fund the life insurance, remains invested and continues to generate growth for the taxpayer’s spouse should he or she outlive the IRA owner. Since the owner replaced the value of the IRA with the life insurance policy, they could consider naming a charity as a contingent beneficiary of the IRA, allowing the couple (upon the death of the second spouse) to pass the balance of the IRA tax-free to charity.

This planning strategy uses distributions from a retirement account to fund a life insurance policy, potentially owned outside their estate if necessary, thereby leaving an income and estate tax-free inheritance to their children. Both the children and the charity could receive the benefit of this planning strategy.

With the significant changes to inheritance planning that was a result of the SECURE Act, it is best to connect with your Yeo & Yeo advisor to determine which alternative estate planning strategy may be best suited to meet your financial goals.

*The IRA value of $740,000 at age 87 assumes the annual withdrawals are the greater of $43,000 or the RMD amount and an interest rate of 4%.

One of the most commonly heard financial planning topics for 2020 is converting a Traditional IRA to a Roth IRA. The reason most often cited for doing so is the anticipation of incomes being lower this year and therefore the tax on conversion could be lower. Here are six factors that are making Roth IRA conversions more attractive than ever before.

1. Protection from a future tax rate increase
Based on the current financial situation in our country, many are predicting tax increases in the future. Paying tax on Roth conversions now at lower rates may pay off for you and your heirs in the future. Since distributions from Roth IRA’s are tax-free for both you and the beneficiaries, they allow you and your heirs to have access to nontaxable income at any time.

2. No age requirements
Roth IRAs are not subject to the normal required minimum distributions at age 72 like other retirement accounts, so that gives taxpayers more flexibility in controlling their income for tax planning purposes down the road. Also, contributions to a Roth IRA are allowed at any age, so as long as a taxpayer has earned income, they can continue to fund a Roth IRA if they choose.

3. Protection from the Medicare surtax
Roth IRA distributions are not subject to the Medicare surtax and are not included in the calculation of the income threshold used to determine if the surtax applies. RMD’s from other taxable retirement accounts are includable and, therefore, can result in taxpayers getting hit with the surtax.

4. Leveraging the market
Converting an IRA while the value is lower due to a downturn in the market, can benefit you in two ways. Since the value is down, you would pay less tax than when the account value was higher. Then, if the account recovers after it is converted to the Roth IRA, that growth would never be taxed when the taxpayers or their heirs withdraw it.

5. Estate planning advantages
Money left in a Roth IRA to your children or other heirs is not taxable to those beneficiaries. This is a benefit to any heirs who may be in a higher tax bracket than the deceased was. The heirs also have the option of leaving that money in a Roth IRA until they have to withdraw it in 10 years, allowing it to accumulate even more tax-free growth in the account that should never be taxed.

6. Tax-free accumulation of wealth
Once funds are converted or contributed to a Roth IRA, there is no tax on any of the money or its earnings, such as dividends, capital gains, interest or distributions themselves, provided certain requirements are met.

While there are many reasons taxpayers should consider converting to Roth IRA’s in 2020, it may not be ideal for certain individual situations. Always consult with your wealth management and tax advisors before making changes to your financial plan. Yeo & Yeo Wealth Management advisors are here to help you analyze your personal circumstances so you can make the best decisions for your financial future. Contact us today.

This communication is for informational purposes only. It is not intended as investment advice or an offer or solicitation for the purchase or sale of any financial instrument. Indices are unmanaged, represent past performance, do not incur fees or expenses, and cannot be invested into directly. Past performance is no guarantee of future results.

We will not reiterate what you have been hearing on the news about the coronavirus. All of the possibilities of things that may happen have been well-publicized.

Our purpose here is to inform you of what HKFS is thinking and how we have positioned portfolios in ways, we believe, make sense for your long-term benefit. First, it is important to understand the markets have reacted to what might happen rather than what has happened. We have had a correction that is roughly 10% on most of the market averages, which is an event that happens at least once almost every year. They usually come out of the blue and happen quickly. From a points-on-the-Dow perspective, with a drop of 3,000 points, it seems like a huge number, especially to those who were around when the index traded below 1,000 (yes, that is ONE thousand!).

As a reminder, over the last several months we made changes to the stock portfolios to weigh more heavily than usual to our U.S. market, and to weigh more heavily than usual to large-cap value and dividend paying companies. As a side note, the funds we primarily utilize for allocation to dividend paying large-cap stocks currently pay dividends equivalent to yields of 3% or more, compared to a safe-haven 10-year Treasury note at approximately 1.25% yield. We believe these were appropriate moves and help in times like these. For portfolios that hold bonds, which is most, prices have actually risen on most bonds over the last few weeks, so stock price declines have been partially offset by gains in bond investments.

While the probabilities of a recession, according to some economists, have risen, most believe recession is not the most likely outcome. Basic fundamental economic numbers remain positive. This sudden stock market correction has priced assets to more closely reflect the higher perceived possibility of a slow-down. We had a very strong rally in stock prices over the last year and into the early part of this year. It was only a matter of time before some catalyst caused a disruption to that rally, and at the risk of sounding trite, nothing goes up forever.

While we always encourage you to speak to your HKFS financial planning consultant about any questions or concerns you have, we don’t believe this is a time to deviate from a long-term investment allocation that has been designed to make sense for you. It is always important to let us know of any circumstances that may have changed so we can help you decide if there are reasons to make adjustments.

Advisory accounts and services are offered through HK Financial Services (HKFS), a SEC-Registered Investment Adviser. Brokerage accounts and services for transaction-based fees are offered through Registered Representatives of ProEquities, Inc., a Registered Broker-Dealer, Member FINRA and SIPC. HKFS and ProEquities are independent unaffiliated entities. 1582835103149

Yeo & Yeo Wealth Management is pleased to announce that Terra Lewis, wealth management assistant, has earned the Financial Paraplanner Qualified Professional (FPQP) designation from the College for Financial Planning.

Peter J. Bender, CPA, CFP^®, managing principal of the firm’s Saginaw office and leader of Yeo & Yeo Wealth Management, said, “Terra has done a great job with all the work involved in Yeo & Yeo’s recent transition to HK Financial Services (HKFS) and ProEquities. Having an FPQP on our team will help Yeo & Yeo Wealth Management reach its fullest potential in serving our clients moving forward.”

Completing the certification involved an in-depth training course, covering five disciplines of financial planning: insurance, investments, retirement, tax and estate. The training provides a broad knowledge in all aspects of personal financial planning, allowing paraplanners to better assist advanced financial planners and their clients.

“As an FPQP, Terra will work directly with our clients in gathering information, answering general questions, updating client records and performing data analysis and projections,” Bender said.

Lewis has been with Yeo & Yeo for nine years. In the community, she volunteers for the CAN Council, Taymouth Township Ladies Auxiliary, and various nonprofit charity events.

DISCLAIMER
Investment advisory services offered through HK Financial Services (HKFS), an Independent Registered Investment Adviser. Commission-based securities products are sold by ProEquities registered representatives and offered through ProEquities, Inc., a Registered Broker-Dealer and Member FINRA and SIPC. HKFS, ProEquities, and Yeo & Yeo Wealth Management are unrelated entities. Neither HKFS nor ProEquities offer accounting, tax or legal services.

Yeo & Yeo Wealth Management was recently recognized as a Top Wealth Advisory Firm* by HK Financial Services (HKFS) for helping businesses and families achieve their wealth management goals.

Yeo & Yeo works in alliance with HKFS to provide independent and objective financial services for clients. Combining the strengths of Yeo & Yeo and HKFS allows Yeo & Yeo to provide more robust financial planning services that help clients better understand their financial situation and reach their goals.

Peter J. Bender, CPA, CFP^® of Yeo & Yeo, also received the President’s Club Award* for the second consecutive year.

The President’s Club award recognizes outstanding individuals for providing wealth management services for high-net-worth clients. It also exemplifies the best of HKFS affiliates who have a high level of ethics, integrity and leadership.

Bender is the managing principal of Yeo & Yeo’s Saginaw office and leads the firm’s wealth management services. He serves on Yeo & Yeo’s board of directors and is a member of the firm’s Agribusiness Services Group and the Estate Planning Group. He has 30 years of experience in auditing, financial planning and tax planning and preparation for businesses and individuals with a focus on family business.

Bender holds the Certified Financial Planner™ designation and is a member of the Financial Planning Association. In our community, Bender serves on the board of directors for Wellspring Lutheran Services and recently served on the Frankenmuth board of directors for multiple terms. He also serves on the St. Lorenz Foundation Finance Committee and the Valley Lutheran High School Growing Campaign Cabinet.

Awards were presented at the virtual HKFS Elevate Annual Conference on October 1.

*Award(s) are neither representative of any client’s experience nor indicative of future performance.

Disclaimer
Investment advisory services are offered through HK Financial Services, Inc. (HKFS). Commission-based securities products are offered through Avantax Investment Services^SM, Member FINRA, SIPC. Insurance services offered through licensed agents of HKFS. HKFS and Avantax are independent of and unrelated to Yeo & Yeo Wealth Management. Neither HKFS nor Avantax provide tax, accounting or legal services. Peter Bender is an Avantax registered representative and a HKFS investment advisor representative.

Disclaimer
Investment advisory services are offered through Avantax Planning Partners^SM. Commission-based securities products are offered through Avantax Investment Services^SM, Member FINRA, SIPC. Insurance services offered through licensed agents of Avantax Planning Partners. 3200 Olympus Blvd., Suite 100, Dallas, TX 75019. The Avantax® entities are independent of and unrelated to Yeo & Yeo Wealth Management. Peter Bender is an Avantax registered representative. Not all Financial Professionals are licensed to offer all products or services. Financial planning and investment advisory services require separate licenses. Avantax® affiliated advisors may only conduct business with residents of the states for which they are properly registered. Please note that not all of the investments and services mentioned are available in every state.