2023 Year-End Housekeeping

We hope our note finds you and your loved ones doing well. As we head toward the end of 2023, we wanted to provide a quick market update and clarify some year-end deadlines.

Market Update

Since January of 2022, we’ve seen tough sledding with a lot of volatility. One of the most affected areas has been the bond market. As we’ve discussed in past newsletters, when interest rates rise, the prices of existing bonds fall because investors would rather buy newly issued bonds paying more in interest. In March of 2022, the Federal Reserve took action to try to tamp down inflation by raising interest rates at the fastest pace since 1980. However, we think we are seeing the final stages of rate increases.

Historically, when the Federal Reserve has stopped hiking interest rates, the bond market has seen strong returns over the following twelve months as those existing bonds become more attractive. We have been tweaking our portfolios to take advantage of this market movement by locking in longer-term yields before anticipated drops in interest rates. This should help offer price appreciation potential and serve as a hedge against a possible hard landing in the economy. Once we see the end of rate hikes, money markets that currently offer attractive rates will no longer look as good as they do today.

Looking back, the market most recently bottomed out on October 13th, 2022 (though not a Friday!), and since then there’s been a great rebound, though it’s felt like two steps forward and one step back. Now more than ever, it’s important to stay invested. Through 2023, we saw a great first half of the year for the stock market, followed by a big drop from July through October. However, investors who cut their losses in October missed out on the S&P 500’s 8.35% return in just the last four weeks. We continue to preach low-cost investments with great diversification, backed by a well-built financial plan. 

Year-End Checklist

Donations

As you have probably noticed, the year-end campaigns have started for many of our favorite non-profits. Giving Tuesday was this week, and it seems as though a day does not pass without us receiving an email or snail mail asking for a donation. If you are so inclined and are eligible, there are two great ways you may be able to contribute to these causes: to donate investments from an after-tax account that have high gains, and to donate dollars directly from your Required Minimum Distribution (RMD) if you have one.

If you have an after-tax account, like an individual, joint, or trust investment account, you may be able to directly donate a holding that has appreciated in value. If you were to sell that position, you would pay capital gains tax on the gain. By donating it, you get to avoid paying that tax, and charities are exempt from it as well. If this applies to you, we can facilitate this style of donation, but we need to know how much you want to donate and where the investment should be sent by December 10th, to allow us to get the transfer completed prior to year-end.

Similarly, if you are subject to required minimum distributions (RMD) from an IRA and would like to make a charitable donation, funds can be transferred directly from your IRA to the charity. Even if you no longer itemize so you don’t get to deduct charitable contributions, by doing a charitable donation directly from your IRA, you get to deduct that amount from your taxable income. Again, we will need to know the name of the charity and the amount you would like to donate by December 10th to allow for this to be completed by year-end. The donation will not report on your 1099-R tax form, so be sure to keep copies of your donation receipts, as well as a note that the donation came straight from your RMD, for when you do your taxes next year.

Roth Conversions

For several of our clients, we have been doing Roth conversions when it makes sense—choosing to pay income tax on purpose while in a lower bracket, to avoid paying tax in a higher bracket later. The funds remain invested within the Roth IRA account but become tax-free when withdrawn in retirement. If you would like to do this, we want to have forms completed by December 17th so that we have plenty of time for it to process before the end of the year. Please note that if you convert funds from an IRA to a Roth IRA, you will have to come up with the taxes out of pocket to be paid next year.

401(k) Catch-Up Contributions for Employees 50+

Secure Act 2.0 changed the 401(k) catch up rule. This change was initially to be effective in 2024 but has been delayed until 2026. Employees over 50 have been allowed to make additional ‘catch up’ contributions to their 401(k) account. When this change is implemented those folks who are eligible and earn over $145,000 must make their contributions to a ROTH 401(k). This will change both the current and future taxes for the contributor. Additionally, it requires companies to add a ROTH 401(k) provision to their retirement plans.

Time to Review Beneficiaries

As we counsel each and every year, we encourage you to review the beneficiaries on your accounts. If you have a will or a trust set up, that’s a great step, but the listed beneficiaries on your accounts come first. If you’ve updated your will or trust recently, you may have changed the people or organizations you want to benefit—please reach out to us so that we can make sure the beneficiaries on your accounts with us align with your wishes. Making updates requires only a simple form. 

New Office Update

On a personal note, we want to thank everyone for your flexibility while we work out of our temporary space in downtown Lake Oswego. We closed on the purchase of our future office in the Raleigh Hills neighborhood of Portland this week. This has been a great learning experience to go through for our team, and now we can move on to the construction phase. With the holidays upon us, our best estimate is that we will move in March or April. We can’t wait to host an open house after the move to welcome our Horst & Graben family to our forever home!

We wish you all the blessings of this holiday season, with good health and good cheer for the loved ones in your life.