2023 Year In Review:
Happy New Year! Looking back at 2023, it was a whirlwind year that began with bank failures in March, continued fighting between Russia and Ukraine, a new war between Israel and Hamas, consistent increases in interest rates, and retreating inflation.
The U.S. stock market was lackluster through October, only to finish with a flurry seeing the final 9 weeks of the year register gains and finish the year with attractive returns. Peeling back the consolidated market numbers, and looking at the details shows that it was a handful of companies that drove a significant portion of the U.S. market returns.
The Magnificent 7 (i.e. Apple, Microsoft, Amazon, Google, NVIDIA, Meta, and Tesla) currently represent a substantial portion of the S&P 500 (28%) allocation.
The average 2023 performance of these 7 companies was 112% ranging from gains of 49% for Apple to 239% for NVIDIA.
Given their significant representation in the S&P 500, the Magnificent 7 pushed the S&P 500 (SPY) performance for 2023 to 26.19% vs the S&P 500 equal weight (RSP) return of 13.70%. In other words, almost half of the return of the S&P 500 was driven by the heavy allocation toward the Magnificent 7.
It’s important to remember this heavy allocation can cut both ways as it did in 2022 when the large technology companies were the biggest losers. The 2022 return for the S&P 500 (SPY) was a loss of 18.17% while the S&P 500 equal weight (RSP) was down only 11.62%. The Nasdaq 100 (QQQ) which is even more heavily tech focused was down 32.58% in 2022.
As we turn our focus toward 2024 and individuals begin to consider planning opportunities for the new year, market concentration and appropriate diversification should be an area to review. The significant concentration around the Magnificent 7 has left many individuals with less diversification than they intend.
Key Takeaway:
The S&P 500 is highly concentrated in the Magnificent 7 companies. Individuals should review their portfolios to ensure adequate diversification.
While we recommend reviewing portfolios to ensure the appropriate diversification, we don’t recommend trying to time the market. While markets and world events are exciting, they are unpredictable in the short-term. If most individuals knew that 2023 would have seen multiple bank failures, continued unrest throughout the world, and four additional interest rate increases, there’s a good chance they would have decided to take a break from the markets for the year. That choice would have been costly.
We don’t know what 2024 holds, and we are certain that over the coming decades there will be many years when markets are down. Recessions will come and go, and no one will consistently predict when they will begin and end. In the long-term, it will be the patient investor that has a well thought out plan, who sticks to that plan, and focuses on the planning opportunities that are within their control that will be rewarded.
Once an appropriate long-term investment plan is in place, individuals should focus their time on the things that are within their control such as implementing the appropriate financial planning and tax strategies that will produce long-term value rather than live and die by short-term market performance.
Looking Ahead to 2024:
As we ring in the new year, it is a great time to review the changes that 2024 will bring and the planning opportunities they present. Additionally, the new year is a great opportunity to take a fresh look at your financial plan to understand what areas still need to be addressed and whether any facts and circumstances have changed that may impact the plan that is currently in place.
Here are a few items to consider as we shift into 2024.
Employer Retirement Plan Contribution Limits:
Contribution limits for retirement accounts are adjusted annually for inflation. For 2024, the contribution limits for employer sponsored plans such as 401(k) and 403(b) plans have increased to $23,000 for pre-tax and Roth deferrals. The catch-up contribution increases this limit by $7,500 (i.e. total deferral limit of $30,500) for individuals turning age 50 or older in 2024.
Also, the lesser-known total additions limit for 401(k) and 403(b) plans is increasing to $69,000 for 2024 which encompasses employer and employee contributions. For those 50 and older, the total additions limit is $76,500.
The total additions limit is important for individuals who receive generous employer matches and/or have the opportunity to make after-tax contributions.
Planning Opportunity – Employer Retirement Plans: Review your workplace payroll elections to ensure you’ve adjusted your contributions to take advantage of the higher limits. Individuals turning age 50 this year should especially review their contributions to ensure they take advantage of the additional $7,500 catch up contribution.
Individuals who work for companies whose retirement plans have features such as after-tax contributions and in-plan Roth conversions should consider maxing out their total additions limit through a mega back door Roth (MBDR) contribution.
MBDR contributions allow individuals to contribute amounts beyond the standard $23,000 employee Roth deferral to the Roth portion of their plan by making after-tax contributions that are immediately converted from the after-tax account to the Roth account. After-tax contributions are subject to the total additional limit, but not the standard $23,000 employee deferral limit.
On the other hand, for individuals who are just starting to save and are only able to contribute a small portion of their salary to retirement, it is important to consider ways to increase savings over time. First it is important to save at least enough to receive the full employer matching contribution.
Once the employer match is received, individuals should consider whether their plan offers an automatic increase feature where they can choose to increase their contribution by a certain percentage each year to gradually work up to an appropriate savings rate.
This feature works well when timed with annual raises because increasing retirement contributions from 10% of salary to 11% of salary at the same time a raise is received reduces the pain of the additional saving.
Key Takeaway:
Review employer retirement plan elections to maximize the benefits of tax advantaged retirement options.
IRA and Roth IRA Contribution Limits:
Similar to employer sponsored retirement plans, the contribution limits for IRA and Roth IRA accounts have increased from $6,500 for 2023 to $7,000 for 2024. The catch-up contribution for those age 50 and older will be indexed to inflation going forward, but remains at $1,000 for 2024.
Planning Opportunity – IRAs/Roth IRAs: There are income thresholds that impact the ability to make deductible traditional IRA contributions and direct Roth IRA contributions. For individuals who are below the income thresholds, it often makes sense to max out the available contributions if cash flow allows.
For individuals whose income exceeds the thresholds, it makes sense to consider whether it is possible to structure retirement assets in a way that allows a back door Roth IRA contribution. Back door Roth IRA contributions were covered in our November 2022 blog post titled “Tax Free Growth with Back Door Roth IRA Contributions” for those that would like a refresher on how back door Roth IRA contributions work.
Because back door Roth IRA contributions can add substantial value through tax-free growth over time, the earlier an individual implements the strategy, the more value it will create throughout their lifetime.
Key Takeaway:
Review income limits for IRA deductions and Roth contributions. High income earners should consider ways to create eligibility for back door Roth IRA contributions.
HSA Contribution Limits:
Health Savings Account (HSA) contribution limits for those covered by high deductible health plans have increased to $4,150 for those with single coverage and $8,300 for those with family coverage. Individuals age 55 and older can also make an additional $1,000 catch-up contribution to their HSAs.
Planning Opportunity – Maximize HSA Contributions: HSA contributions are the most tax advantaged savings accounts available because they provide for pre-tax/tax deductible contributions, tax-deferred growth, and tax-free distributions for qualified medical costs. This triple tax benefit is hard to beat with any other savings vehicle.
Further if contributions to the HSA are made directly through an employee’s payroll, the income used to make the contributions is not subject to FICA (i.e. Social Security and Medicare) taxes which can result in additional savings of up to 15.3% when combining the employee and employer share! Many employers also offer a matching contribution to HSAs for eligible employees.
Individuals who have HSA accounts and are on high deductible health plans should ensure they are maximizing their contributions to their HSA accounts and are receiving the related tax benefits and employer contributions.
Individuals who would like to increase the value of their HSA account even further can pay for medical expenses using external funds and save receipts to maximize the benefits of tax-free growth over time as we discussed in our previous blog post titled “Triple Tax Savings With Health Savings Accounts.”
Key Takeaway:
HSAs are the most tax efficient accounts for saving. Eligible individuals should prioritize making the maximum annual contribution if they are able.
529 Educational Savings Account to Roth IRA Rollovers:
The Secure Act 2.0 created a new provision that allows individuals who have 529 educational savings accounts to roll a portion of the account over to a Roth IRA for the 529 account beneficiary. This provision goes into effect in 2024.
There are a few restrictions associated the rollover provision including that the 529 account has to have been maintained for the beneficiary for 15 years, the funds rolled over must be traceable to contributions made at least 5 years prior, the maximum rollover amount is $35,000, and the amount rolled over each year is still subject to the annual Roth IRA contribution limit (i.e. $7,000 in 2024).
While the restrictions add complexity to the Roth rollover option, the option does create an attractive way to remove balances from an overfunded 529 account in the event a student doesn’t use all the funds for education.
Planning Opportunity – Consider Contributing To A 529 Account: Parents and grandparents can consider whether helping their children and grandchildren with the cost of education is part of their long-term goals. If it is, a 529 account is a tax efficient option for college savings.
The primary benefit of a 529 account is that all growth is tax free if used for qualifying educational expenses including tuition, fees, books, room and board, and even up to $10,000 annually for K-12 education.
Given tax-free growth is the primary benefit of 529 accounts, the sooner the funds are invested and the longer they have to grow, the larger the tax benefit is likely to be. In the past, making contributions when children were very young in order to maximize the long-term growth had more risk because there was no way to know whether the child would use all the funds for education.
Now with the 529 to Roth rollover option, there is a tax efficient option to redirect those funds toward retirement savings for the beneficiary while maintaining the tax-free growth in the event the beneficiary doesn’t use all the funds for education.
Key Takeaway:
The SECURE Act 2.0 provides an opportunity to rollover up to $35,000 of excess 529 funds to the beneficiary’s Roth IRA if the beneficiary doesn’t use all the funds for education.
Inflation Adjustments for Tax and Estate Planning:
For 2024, federal tax brackets will be adjusted higher by 5.4% to account for annual inflation with the top tax bracket of 37% reaching $609,350 for single filers and $731,200 for married taxpayers filing a joint return. The standard deduction for 2024 will also increase by 5.4% to $14,600 for single filers and $29,200 for those filing joint returns
On the estate tax side, federal thresholds for the basic estate exclusion amount increased from $12,920,000 to $13,610,000 per person in 2024 allowing all but the largest estates to avoid paying any federal estate tax. At the same time, it’s also important to remember that certain states have their own estate tax and often impose it at much lower thresholds such as Minnesota whose estate exclusion is only $3,000,000.
As we contemplate the current tax changes for 2024, it’s also important to keep in mind that many of the current tax regulations are tied to the 2017 Tax Cuts and Jobs Act and are scheduled to expire after 2025 unless Congress intervenes. The effect of the expiration will be a reduction in the standard deduction, a return of personal exemptions, an increase in most brackets of 2-3%, a compression of certain brackets, and the reduction of the federal estate exclusion by half.
Planning Opportunity – Tax and Estate Planning: Tax planning should be reviewed on an annual basis to identify any available opportunities in light of current year income, regulations, and the potential for tax rules to revert back to the pre-Tax Cuts and Jobs Act era.
Similarly with the ever-changing regulations, estate planning strategies should be regularly reviewed to ensure the current plan is appropriate as facts and circumstances change. It’s also important to keep in mind that estate planning is not just for individuals with significant wealth. Even families who are just starting out should consider their estate plan to ensure they have the appropriate documents in place to protect themselves and their loved ones in the event they become incapacitated or pass away.
Key Takeaway:
Tax and estate laws change frequently as do facts and circumstances for each individual. Ongoing tax planning and frequent reviews of the estate plan are necessary to ensure the intended results are achieved.
Life and Disability Insurance Review:
Finally, while it isn’t new for 2024, few things can be more detrimental to a family’s finances than the injury or death of someone whose income provides for the family’s basic needs.
Accordingly, life and disability insurance is an important part of protecting the family. As individuals consider their 2024 resolutions, it is worth reviewing current life and disability insurance coverages to ensure loved ones are protected from unexpected events.
Most families will find that term life insurance is generally the best approach to provide for financial needs if future income is lost due to an individual passing away. Term life insurance protects the life of the insured individual for a specific period of time (i.e. 10, 20, or 30 years). The ultimate goal is to save enough over 20-30 years to no longer need life insurance after that point; so typically, term insurance is sufficient.
Similarly, disability insurance can provide income if a worker becomes disabled rather than passes away. Often disability insurance is provided through a worker’s employer, but private disability insurance can be purchased as well.
As families consider the new year, they should consider their current insurance coverage and ensure their families will be protected in the event one of them becomes disabled or passes away.
Key Takeaway:
Ensure your family is protected in the event that future income is lost due to death or disability.
Consider Assistance with Your Comprehensive Plan:
Many individuals appreciate assistance as they ensure they have a comprehensive plan in place that incorporates all the yearly changes and coordinates their estate, tax, investment, and financial plans to ensure that everything is working together toward a common goal.
For those who would like assistance, it’s important to consider working with an independent, fee-only, fiduciary advisor. While the term “financial advisor” is used commonly, the truth is that there are very few independent, fee-only, fiduciary advisors. Working with an independent, fee-only, fiduciary advisor provides you with the following:
Independence – Independent advisors are not registered representatives of large financial institutions that create financial products to sell. That means independent advisors can recommend the solutions that are best for you and your situation rather than being restricted to offering only the products of the firms they represent.
Fee-Only – A fee-only advisor does not receive commissions or compensation from third parties for the recommendations made to clients. Their only compensation comes directly from the client based on a transparently agreed upon fee. Clients do not have to wonder whether a recommendation is being presented because of behind-the-scenes compensation the advisor will receive from a third party.
When considering advisors, keep in mind that “Fee-Based” is very different from “Fee-Only.” For more details on the distinction, refer to our previous blog post titled “How Do I Choose The Right Financial Advisor?”
Fiduciary – While much of the financial industry is structured to create profits for financial institutions rather than the individuals they serve, a fiduciary advisor is required to place the interest of their clients first at all times. By working with someone who is a fiduciary 100% of the time, you can be sure their loyalty is only to you.
Working with an independent, fee-only, fiduciary advisor provides you with a trusted partner who you know is putting your interests first as you work together to reach your goals.
Key Takeaway:
Very few “financial advisors” are independent, fee-only, fiduciary advisors. Consider whether an independent, fee-only, fiduciary advisor is the right fit for your family.
Conclusion:
As we move into 2024 with anticipation, it’s important for individuals to review their finances and ensure they are taking the steps within their control to continue moving forward toward their long-term goals.
While focusing on the day-to-day, week-to-week, and year-to-year movements of the stock market are fascinating, the reality is that the short-term movements of the market are unpredictable and out of anyone’s control.
Accordingly, the best approach to ensure success is to focus on the ongoing planning opportunities that are within your control. By implementing a comprehensive plan that ensures all areas of your finances are working together, you will be more likely to reach your goals in the future.
If you are interested in considering whether an independent, fee-only, fiduciary advisor is a good fit to help you create and implement a comprehensive financial plan for your family, our Family CFOs would love to connect to see if what we do is right for you.
