All Too Routine “Extraordinary Measures”

Chris Kamykowski, CFA®, CFP® (Head of Investment Strategy and Research)
Rich McDonald, MBA (Head of Portfolio Management and Trading) 

Per the announcement yesterday (1/19), the US Treasury Department is beginning the use of “extraordinary measures” to keep paying government bills especially monies owed to government bondholders.  That message sounds ominous but has been well known for some time now and these measures have been used before. Prior to today, “extraordinary measures” has been a common occurrence and has been enacted 9 times since 2010: 

• May 2011 
• December 2012 
• May 2013 
• February 2014 
• March 2015
• March 2017 
• December 2017 
• March 2019 
• August 2021 

US Treasury Secretary Janet Yellen has stated that the Treasury can pay all obligations until at least early June using these accounting maneuvers.  These allow lawmakers about 5 months to figure out the debt limit – either by suspending or raising the debt limit. Republicans oppose raising the debt limit unless Democrats agree to spending cuts. The Democrats control the Senate and have the support of President Biden in saying they won’t be bullied into making cuts.  It’s up to lawmakers to produce a resolution as soon as possible but at this point the two sides seem very far apart. That said, according to the US Treasury, Congress has always acted when called upon to raise the debt limit. Since 1960, Congress has acted 78 separate times to permanently raise, temporarily extend, or revise the definition of the debt limit – 49 times under Republican presidents and 29 times under Democratic presidents. 

Many have bad memories of the debacle of 2011’s debt ceiling debate.  It led to major consternation in the markets and ultimately, one of the major rating agencies, S&P, downgrading the US one notch from AAA to AA+ based on concerns of budget deficits and congressional inaction. Today, one can hope that politicians have learned it is bad policy to mess with the “full faith and credit” of the US which should be enough motivation to work together toward a solution.  However, politicians being of a sort to regularly haggle, there will be plenty of back and forth between parties.  Motivation to negotiate in good faith may be linked to the fact the Fed is not in the same position to calm markets as it was in 2011 when it enacted QE3; today, we are staring at a Fed set on reducing inflation through tighter monetary policy, something they will likely be reluctant to budge from due to Congressional ineptitude or stubbornness.  

Any failure by the U.S. to make interest payments on time could cause havoc in the financial markets as markets prefer certainty to uncertainty; when we are talking about THE risk-free rate that underpins global financial markets, this is even more apparent. Clearly, the closer we get to June without a resolution, the more perilous the situation could become.  However, at this point, compromise is the likely outcome if one looks to history but the path there will see potential for market volatility.  It’s also extremely possible this drags out until the very last moment.   

Finally, for perspective as markets fret about the debt ceiling, below are one year returns for the S&P 500 index following the initiation of previous “extraordinary measures”; past is not indicative of future returns, but more often than not, the market has moved past the debt ceiling concern to higher levels one year later. 

Sources: 

Morningstar 

 https://bipartisanpolicy.org/debt-limit-through-the-years/ 

https://home.treasury.gov/policy-issues/financial-markets-financial-institutions-and-fiscal-service/debt-limit 

Definitions: 

The S&P 500 Index is a free-float capitalization-weighted index of the prices of approximately 500 large-cap common stocks actively traded in the United States. 

Disclaimer 

© 2023 Advisory services offered by Moneta Group Investment Advisors, LLC, (“MGIA”) an investment adviser registered with the Securities and Exchange Commission (“SEC”). MGIA is a wholly owned subsidiary of Moneta Group, LLC. Registration as an investment advisor does not imply a certain level of skill or training. The information contained herein is for informational purposes only, is not intended to be comprehensive or exclusive, and is based on materials deemed reliable, but the accuracy of which has not been verified.  

Trademarks and copyrights of materials referenced herein are the property of their respective owners. Index returns reflect total return, assuming reinvestment of dividends and interest. The returns do not reflect the effect of taxes and/or fees that an investor would incur. Examples contained herein are for illustrative purposes only based on generic assumptions. Given the dynamic nature of the subject matter and the environment in which this communication was written, the information contained herein is subject to change. This is not an offer to sell or buy securities, nor does it represent any specific recommendation. You should consult with an appropriately credentialed professional before making any financial, investment, tax or legal decision. An index is an unmanaged portfolio of specified securities and does not reflect any initial or ongoing expenses nor can it be invested in directly. Past performance is not indicative of future returns. All investments are subject to a risk of loss. Diversification and strategic asset allocation do not assure profit or protect against loss in declining markets. These materials do not take into consideration your personal circumstances, financial or otherwise. 

 

 

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source https://monetagroup.com/blog/all-too-routine-extraordinary-measures/

How Do I Create Cash Flow in Retirement?

Transitioning from receiving a consistent amount via a paycheck to funding your own cash flow in retirement can be a stressful time.  Moneta is here to help relieve that burden.  Let’s talk about how we approach funding your ongoing cash needs.

 

A seamless way to make this change is to create a systematic transfer from the portfolio to your checking account to cover your typical monthly living expenses.  We refer to this as a “paycheck replacement.”  Though instead of your employer or business writing the check, you are the one in charge of the amount.

We also want to consider other cash needs that might occur in a given time period, generally 6 months ahead.  This provides sufficient lead time to have the cash on hand before the expenses arise.  Cash needs can include the “paycheck replacement” monthly transfers, plus payments for things such as taxes, insurance, travel, and home projects.

When looking to the portfolio to provide these funds, interest, dividends, as well as the growth of the investments are all sources.

 

 

We evaluate the portfolio’s asset allocation to determine the best space to harvest profits.  These funds are then set aside as a cash reserve to cover the pre-determined cash needs.  The process repeats itself each time we get together for a Financial Review update.

If you have more financial questions, don’t hesitate to ask your Family CFO.  We do more so you can too.

 

© 2023 Moneta Group Investment Advisors, LLC. All rights reserved. These materials were prepared for informational purposes only based on materials deemed reliable, but the accuracy of which has not been verified. Examples contained herein are for illustrative purposes only based on generic assumptions. This is not an offer to sell or buy securities, nor does it represent any specific recommendation.  You should consult with an appropriately credentialed professional before making any financial, investment, tax or legal decision. Past performance is not indicative of future returns. These materials do not take into consideration your personal circumstances, financial or otherwise.

The post How Do I Create Cash Flow in Retirement? appeared first on Moneta Group.

source https://monetagroup.com/blog/how-do-i-create-cash-flow-in-retirement/

If You Receive Restricted Stock or Stock Options, Consider This Tax-Saving Move

By Michael Torney, CFP, J.D., LL.M. 

Paying taxes when receiving stock grants instead of waiting for shares to vest could help you save thousands of dollars. 

Corporate executives often receive restricted stock or stock options as part of their total pay. But it’s possible to save a significant amount of money by taking advantage of section 83(b), a somewhat obscure, but important section of the Internal Revenue Service Code. 

Federal law allows individuals to pay taxes in the same year the stock awards are granted, even though the stock hasn’t yet vested. This is done through what’s called an 83(b) election.  Why would an investor do this?  The stock price at the grant date may be much lower than when the stock vests and is sold; this means the taxes owed can be tens, even hundreds of thousands of dollars less if paid when the stock award is granted.  

This special 83(b) election can be used for stock awards that have not fully vested, such as restricted stock and stock options. 

How Restricted Stock and Stock Options Work 

Restricted stock are shares of your company’s stock that will vest at a future date. For example, if you are granted 10,000 shares of stock in January 2023, but the shares don’t vest for three years, you won’t own these shares without restrictions until January 2026.  

If you anticipate the stock price will be higher in January 2026, you can minimize the tax bill by filing an 83(b) election and paying taxes on the value of the stock in January 2023. That means you’ll pay less in tax if these shares appreciate in value. 

Stock options are usually either incentive stock options (ISO) or non-qualified stock options (NSO).  Stock options give employees the right to buy or exercise shares of company stock at a pre-set price. ISO and NSO options are taxed differently.  Both of these options present some tax-saving opportunities with an 83(b) election, though the planning varies for each; 83(b) tax strategies for NSO and ISO options are covered in a different blog.  Let’s look at how you can save taxes on your restricted stock using an 83(b) election. 

Restricted Stock and an 83(b) Election 

If you receive restricted stock, here’s an example of how an 83(b) election can save money.  

On January 1, 2018, a senior-level executive at Apple, Inc., is awarded 10,000 shares of company stock that will vest in three years. The price at that time was $39.80, so the 10,000 shares are valued at $398,000. If the executive does not make the 83(b) election, there is no tax due.  Three years later, on Jan. 1, 2021, Apple’s stock price rose to $130.39. The executive’s shares – which they now own outright – are now worth $1,303,900.  There is now ordinary income tax due on $1,303,900. 

If instead, the executive made the 83(b) election, they would have included the $398,000 as part of their income when filing 2018 taxes.  Here’s why that’s important. No taxes are due upon vesting since they have already been paid.  Because the stock is now valued at over $900,000 more than when it was granted, the additional $900,000 of gain is deferred.   

Selling Your Stock 

It’s January 2, 2022. The executive decides to sell their shares one year and one day after the shares vest. The executive waits this long because a person must keep their shares for more than one year prior to selling for any profit to be taxed at more preferential capital gains rates. However, if the 83(b) election was made, then the holding period began at the grant date when the restricted stock compensation was included in income. In this example, the executive would not have needed to wait the extra year to be taxed at long-term capital gain tax rates. 

At this point, the shares are valued at $1,737,700 – nearly $1.3 million more than when the stock was granted. But once the stock is sold, the executive is only responsible for capital gains taxes – a maximum of 20 percent of profits – rather than the rate for ordinary income taxes, which can be as high as 37 percent. 

The tax will be applied on any gains above the taxpayer’s cost basis.  If the 83(b) election was made, the cost basis is $398,000.  If the election was not made, the cost basis is $1,303,900.   

How the Tax Math Stacks Up 

We need to make some assumptions about our hypothetical taxpayer to play out taxes.  Let’s say he lives in Florida, a state with no state income tax.  And he’s in the 37% federal tax bracket (for simplicity, we will ignore the Social Security and Medicare taxes on the ordinary income, which are additional savings in favor of the 83(b) election in this example). This means he will pay 23.8% in capital gains taxes for 2023 (20% capital gain plus 3.8% net investment income tax).  

No 83(b) Election: If the executive did not make the 83(b) election, he pays 37% of $1,303,900 (taxes due at stock vesting) and an additional 23.8% of $433,800 ($1,737,700 minus $1,303,900 cost basis).  The total tax due is $585,687.40.   

83(b) Election: If the executive did make the 83(b) election, he pays 37% of $398,000 (taxes due at stock grant) and an additional 23.8% of $1,339,700 ($1,737,700 minus $398,000 cost basis).  Total tax due is $466,108.60. 

When It Makes Sense to File an 83(b) 

Filing a section 83(b) election makes sense for some people, but not for everyone. Consider making an 83(b) election if: 

• You receive restricted stock with a low market value per share at the time of grant or options with a strike price that is close or equal to the market value per share.
• You can afford to pay any costs associated with the election;  
• You believe the value of the company’s stock will increase significantly over time; 
• The risk that you will forfeit the stock is small. For example, you expect to be with the company until the stock vests. 
• You believe you will be able to sell your stock later at a higher price 

For restricted stock, the election must be made within 30 days of receiving the award. For options, the election must be made within 30 days of exercise. You should confirm that your company’s plan allows you to exercise options before they vest. 

Making a decision on whether to file an 83(b) election can be a difficult choice. If you have questions about this topic or other issues involving stock compensation, contact our team at Duffteam@monetagroup.com. We offer a free consultation to discuss how a comprehensive financial plan could help serve you well now and during retirement. 

 

 

© 2022 Advisory services offered by Moneta Group Investment Advisors, LLC, (“MGIA”) an investment adviser registered with the Securities and Exchange Commission (“SEC”). MGIA is a wholly owned subsidiary of Moneta Group, LLC. Registration as an investment advisor does not imply a certain level of skill or training. The information contained herein is for informational purposes only, is not intended to be comprehensive or exclusive, and is based on materials deemed reliable, but the accuracy of which has not been verified.  

Trademarks and copyrights of materials referenced herein are the property of their respective owners. Index returns reflect total return, assuming reinvestment of dividends and interest. The returns do not reflect the effect of taxes and/or fees that an investor would incur. Examples contained herein are for illustrative purposes only based on generic assumptions. Given the dynamic nature of the subject matter and the environment in which this communication was written, the information contained herein is subject to change. This is not an offer to sell or buy securities, nor does it represent any specific recommendation. You should consult with an appropriately credentialed professional before making any financial, investment, tax or legal decision. An index is an unmanaged portfolio of specified securities and does not reflect any initial or ongoing expenses nor can it be invested in directly. Past performance is not indicative of future returns. All investments are subject to a risk of loss. Diversification and strategic asset allocation do not assure profit or protect against loss in declining markets. These materials do not take into consideration your personal circumstances, financial or otherwise. 

 

The post If You Receive Restricted Stock or Stock Options, Consider This Tax-Saving Move appeared first on Moneta Group.

source https://monetagroup.com/blog/if-you-receive-restricted-stock-or-stock-options-consider-this-tax-saving-move/

Learning From a Legacy

“Philanthropy is commendable, but it must not cause the philanthropist to overlook the circumstances of economic injustice which make philanthropy necessary.”¹

 

On January 16, America celebrates the legacy of Reverend Dr. Martin Luther King, Jr. In addition to his well-known civil rights activism, Dr. King was a proponent of financial literacy, identifying financial independence as a source of freedom. He believed that social inequality was driven by poverty, and he encouraged his audiences to bolster their aspirations with sound economic principles: understanding debt, spending wisely, and not competing with one’s neighbors through excessive materialism.

The Moneta Charitable Foundation focuses on financial literacy and economic access, in alignment with Dr. King’s advocacy. Our team members volunteer in classrooms and partner with nonprofits that teach healthy money habits, supporting practices that will last a lifetime.

Moneta thanks to our clients for their ongoing philanthropic and community investments, and we will continue to actively support financial education and asset-building to support our neighbors in the St. Louis area and beyond.

1 Strength to Love, 1963

© 2023 Advisory services offered by Moneta Group Investment Advisors, LLC, (“MGIA”) an investment adviser registered with the Securities and Exchange Commission (“SEC”). MGIA is a wholly owned subsidiary of Moneta Group, LLC. Registration as an investment advisor does not imply a certain level of skill or training. The information contained herein is for informational purposes only, is not intended to be comprehensive or exclusive, and is based on materials deemed reliable, but the accuracy of which has not been verified.

Trademarks and copyrights of materials referenced herein are the property of their respective owners. Examples contained herein are for illustrative purposes only based on generic assumptions. Given the dynamic nature of the subject matter and the environment in which this communication was written, the information contained herein is subject to change. This is not an offer to sell or buy securities, nor does it represent any specific recommendation. You should consult with an appropriately credentialed professional before making any financial, investment, tax or legal decision. All investments are subject to a risk of loss. Diversification and strategic asset allocation do not assure profit or protect against loss in declining markets. These materials do not take into consideration your personal circumstances, financial or otherwise.

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source https://monetagroup.com/blog/learning-from-a-legacy/

stage 33 portal testing, article for MON-2644

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source https://monetagroup.com/blog/stage-33-portal-testing-article-for-mon-2644/

When The Party is Over – Better Safe Than Sorry

Aoifinn Devitt – Chief Investment Officer

It is common to start a new year with a sense of hope and anticipation.  This year, however, the scars of a bruising equity and bond market are still felt. 2022 displayed the worst equity performance in US equity markets since 2008, and when the bond market performance was added, it was particularly challenging for traditionally balanced portfolios.

As we start the new year, uncertainty continues to percolate – whether it is surrounding a downturn to come in earnings, or the pervasive evidence of corporate woes.  Trading warnings such as that of Party City and Bed Bath & Beyond may have been a long time coming, but the evidence that limping companies are running out of road will be a milestone of sorts.  While 2020 and massive disruptions in consumer activity were met with bailouts and subsidies, this, together with the distorted nature of consumer behavior – fewer parties/more home improvement, less demand for services/a boom in online shopping – probably artificially prolonged the life of impaired companies. We expect that these two entities will not be the last to struggle in the months ahead.

Equity markets turned upwards in the last few days, following a lackluster end to the year, with value outperforming growth and defensive areas such as infrastructure performing well.

Source: Morningstar as of 1/10/23

This echoes our theme of safety for the first half of 2023 – we believe that given the overhang of company earning outlooks, investors will likely do well to focus on defensive sectors – like healthcare, utilities, consumer staples – and to expect further volatility in higher growth sectors such as technology and consumer discretionary. The dramatic downturn of Tesla may well be a bellwether for a lower confidence level in projections and growth plans.

News of layoffs, most recently from financial services firms such as Goldman Sachs, will further weigh on consumer sentiment, and already it appears that 4Q earnings will be delivered with a strong dose of caution.

The labor market remains strong though. The December employment report showed 223,000 jobs added in non-farm employment and the overall unemployment rate declining to 3.5% – while this is still positive news, the number of jobs added has slowed since the first half of 2022 when the monthly pace of growth averaged 444,000. This less frothy employment picture may give the Fed some comfort that their unprecedented rate of interest rate hikes (seven in 2022) are being felt in terms of deflating consumer demand and combatting inflation.  The Fed minutes of December confirmed that the Committee had made “significant progress” in getting policy to a sufficiently restrictive stance but remained committed to “ongoing increases” in the overnight rate as appropriate. They noted their preference to retain “flexibility and optionality”, which is not particularly surprising, but it gives them cover to not take anything (further rate hikes, further deceleration or even a pause) off the table.

Overall, we believe bonds look increasingly attractive at these levels, particularly as inflation starts to become unstuck.  We will be watching the coming December inflation number with interest and we expect to see a continuation of the downward trend evinced in recent months.

© 2023 Advisory services offered by Moneta Group Investment Advisors, LLC, (“MGIA”) an investment adviser registered with the Securities and Exchange Commission (“SEC”). MGIA is a wholly owned subsidiary of Moneta Group, LLC. Registration as an investment advisor does not imply a certain level of skill or training. The information contained herein is for informational purposes only, is not intended to be comprehensive or exclusive, and is based on materials deemed reliable, but the accuracy of which has not been verified.

Trademarks and copyrights of materials referenced herein are the property of their respective owners. Index returns reflect total return, assuming reinvestment of dividends and interest. The returns do not reflect the effect of taxes and/or fees that an investor would incur. Examples contained herein are for illustrative purposes only based on generic assumptions. Given the dynamic nature of the subject matter and the environment in which this communication was written, the information contained herein is subject to change. This is not an offer to sell or buy securities, nor does it represent any specific recommendation. You should consult with an appropriately credentialed professional before making any financial, investment, tax or legal decision. An index is an unmanaged portfolio of specified securities and does not reflect any initial or ongoing expenses nor can it be invested in directly. Past performance is not indicative of future returns. All investments are subject to a risk of loss. Diversification and strategic asset allocation do not assure profit or protect against loss in declining markets. These materials do not take into consideration your personal circumstances, financial or otherwise.

 

The post When The Party is Over – Better Safe Than Sorry appeared first on Moneta Group.

source https://monetagroup.com/blog/when-the-party-is-over-better-safe-than-sorry/

Stg article bug related to topic – test

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