Bonds in 2022

Posted On December 12, 2021 By Admin In Portfolio Management /

Resuming last week’s Investment Themes, today we consider Bonds in 2022. It is a challenging environment for bond investors. We are coming off record low yields and the yield on the 10-year Treasury is still only 1.5%. At the same time, yields are starting to move up. And since prices move inversely to yields, the US Aggregate Bond index ETF (AGG) is actually down 1.74% year to date. Even including the yield, you’ve lost money in bonds this year. With stocks having a great year in 2021, it is frustrating to see bonds dragging down the returns of a diversified portfolio.

Inflation Hurts Bonds

Inflation is picking up in the US and globally. Supply chain issues, strong demand for goods, and rising labor costs are increasing prices. The Federal Reserve this week said they would be removing the word “transitory” from their description of inflation. And now that it appears that Jay Powell will remain the Chair, it is believed that the Fed will focus on lowering inflation in 2022. They will reduce their bond buying program which has suppressed interest rates. And they are expected to gradually start increasing the Fed Funds rate in 2022.

It is difficult to make accurate predictions about interest rates, but the consensus is that rates will continue to rise in 2022. So, on the one hand, bonds have very little yield to offer. And on the other hand, you will lose money if interest rates continue to climb. Then, to add insult to injury, most bonds are not maintaining your purchasing power with inflation at 6%.

Bond Themes for 2022

There aren’t a lot of great options for bond investors today. But here are the bond investment themes we believe will benefit your portfolio for the year ahead. This is how we are positioning portfolios

We will be increasing our allocation to Floating Rate bonds (“Bank Loans”). These are bonds with adjustable interest rates. As rates rise, the interest charged goes up. These are a good Satellite for rising rate environments.
Within core bonds, we want to reduce duration to shorter term bonds. This can reduce interest rate risk.
We continue to hold Preferred Stocks for their yield. While their prices will come under pressure if rates rise, they offer a continuous cash flow.
Ladder 5-year fixed annuities. I have been beating this drum for years. Still, multi-year guaranteed annuities (MYGA) have higher yields than CDs, Treasuries, or A-rated corporate and municipal bonds. If you don’t need the liquidity, MYGAs offer a guaranteed yield and principal.
I previously suggested I-Series Savings Bonds rather than TIPS. These are linked to inflation and presently are paying 7.12%. Purchases are limited to $10,000 a year per person, and unfortunately cannot be held in a brokerage account or an IRA. Read my recent article for more details. I personally bought $10,000 of I-Bonds this week.

Purpose of Bonds

Even with a negative environment for bonds, they still have a role in most portfolios. Unless you have the risk capacity to be 100% in stocks, bonds offer crucial diversification. When we have a portfolio with 60% stocks and 40% bonds, we have an opportunity to rebalance. When stocks are down, like in March of 2020, we can use bonds to buy more stocks while they are on sale. And of course, a portfolio with 40% in bonds has much less volatility than one which has 100% stocks.

Yields may eventually go back up to more normal levels. While it would be nice to have higher yields, the process of yields going up will be painful for bond investors. Our themes are trying to reduce this “interest rate risk”. We hope to reset to higher rates in the future, while reducing a potential loss in bond prices in 2022.

Investment Themes for 2022

Posted On December 5, 2021 By Admin In Financial Planning /

Let’s look ahead to 2022 and consider what investment themes we believe should be incorporated into our portfolio models. This process is not meant to be a prediction of whether markets will be up or down. I don’t think anyone can time the market successfully. (Here is my letter to clients from March 21, 2020 for reference.) Rather, my goal is to add value to our investment process in three ways.

One, we want to tilt towards areas of relative value. That means when one category is cheap and another is expensive, we want to have more of the cheap stocks and less of the expensive stocks. This sounds obvious, but many investors chase performance without regard to valuation. Inadvertently, they load up on expensive stocks. Tilting towards cheaper categories is inherently contrarian as we are often buying what has recently lagged.

Two, we aim to identify Satellite categories which are attractive under the current market environment. Unlike our Core positions, Satellite positions are temporary and may be removed in future years. Satellite investments are stocks or bonds in a smaller, more focused niche than our core funds. For example, a Floating Rate Bond fund would be a satellite fund, whereas an Investment Grade Bond Index fund would be a core position. We select satellite funds with the goal of enhancing returns.

Three, to diversify our portfolios better, we include Alternative investments. We are looking for investments outside of the usual stock and bond categories which might offer an acceptable return, but with low correlation to the risks of stock markets or interest rates. This could include Real Estate, Hedge Fund Strategies, Preferred Stocks, Convertible Bonds, Commodities, Managed Futures, etc. Typically, these provide some ballast when stocks have a Bear Market, so their primary purpose is to reduce risk, rather than to increase return.

Stocks in 2022

Today, we are looking at our investment themes for stocks for 2022; next week we will cover bonds and alternative investments. Needless to say, there is a lot of uncertainty about the stock market going into 2022. As investors, we have to come to terms with the fact that markets do not always provide us with a clear and obvious direction. Uncertainty is the normal state.

No one knows what will happen with the virus or with the Federal Reserve trying to slow inflation without hurting the economy. Those are the two big questions facing stock investors at the end of 2021. However, those are known unknowns. Often, markets are surprised more by the unknown unknowns – the risks we aren’t even considering right now.

Over the past 50 years, the S&P 500 Index was down 12 years, up 37 years, and exactly at 0% in 2011. The 10-year return of the S&P 500 is 16% a year. Being negative on stocks has proven to be a losing bet over time. Yes, you can lose money on stocks and past performance is no guarantee of future results. With that disclaimer, I see no reason to attempt to try to time the market today and withdraw from stocks.

Tilts: Value, International, Small

Here is what I am doing for 2022: weighing relative valuations between stock categories. There are stocks which have gone way up and are probably overvalued. But there are also stocks which have lagged and are relatively cheap. We can break this down three ways: Growth versus Value stocks, US versus International Stocks, and Large versus Small companies.

Growth has lead the markets for more than a decade. As a result, the spread between value and growth categories has widened to historic levels. In fact, the difference today between Value and Growth is equal to what it was during the Tech bubble in 1999. For 2022, we are increasing our tilt towards Value. While we have little in pure Growth funds, we will be reducing our cap weighted index funds, which have become concentrated in Growth names.

US Stocks have led international for a long-time and there is now a wide gap in valuations. US stocks, especially Growth, are expensive. Most US investors have a significant home bias. For 2022, we will shift a small percentage from US to International. We are already overweight in Emerging Markets, and are not adding to our positions in EM.

Small versus Large has been very interesting in 2021. In the US, Small Value has had a great year and looks promising for 2022. US Small Growth, however, lagged Large Growth by more than 20%. In other developed markets, small cap lagged large cap by a small amount. In Emerging Markets, small cap outperformed large cap by more than 20% year to date. There is not a uniform trend here, except that Small Value has done better than Small Growth. In terms of diversifying and looking for cheap stocks, our small cap selection will lean towards value rather than core or growth.

Taxes Matter

We will be making trades to our portfolios for 2022. Even after these trades, a 60/40 portfolio is still going to have about 60% in stocks and 40% in bonds. But the weightings of the positions will change slightly and some of the funds used may change. Our goal is to reduce risk and stay broadly diversified, while using low-cost investments that are transparent and have a good track record.

Throughout the process, we aim for tax efficiency. Changes are easy to incorporate in IRAs and that is always our first choice. In taxable accounts, we harvested losses in March of 2020, which carried forward to 2021. That can also allow us to make some changes without creating additional taxes for the year. And while I could automate the trading process, I am looking at this one client at a time, to do what is best for you, not easiest for me.

Next week, we will discuss our investment themes for 2022 for bonds and alternatives. Then we will be placing trades at the end of December and into January for most clients. I should note that even without making any changes to the portfolio models, we would still be looking to rebalance here at the end of the year. We will do both steps at the same time – rebalancing and any changes to the model – to avoid any unnecessary trades.

I examine investments all year round, but try to limit changes to once a year to avoid short-term trading. Each year, in the fourth quarter, I go through a process of reviewing all our holdings and our allocations. Here is what I wrote last year, looking ahead to 2021: Investment Themes for 2021

Have concerns about your investment portfolio or specific investments? Will your portfolio be sufficient to achieve your goals? How will you transition your accumulation portfolio to spending it down? These are uniquely individual questions and where our conversations can be the most valuable.

Year End Tax Planning 2021

Posted On November 21, 2021 By Scott Stratton, CFP(R), CFA In Financial Planning /

Let’s discuss some of the key year end tax planning strategies for 2021. It has been a remarkable year with markets soaring, inflation picking up, and the economy booming as we recover from the Pandemic crash last year. A year and a half ago, there were losses everywhere. Now, investors in stocks, real estate, cryptocurrency, and other assets are facing significant gains. Taxes are a major concern.

Here are 10 tax steps to consider before December 31.

Capital Gains Considerations

1. Beware of active mutual funds distributing large capital gains in December. If you have active funds in a taxable account, then make sure you are NOT reinvesting dividends. Better to take that cash and invest in a more efficient ETF or to rebalance.

2. Harvest losses, if you have any for 2021. We harvested losses via tax swaps last year and carried forward tremendous tax benefits into 2021 for our clients. This will help us as we look to rebalance portfolios at year-end.

3. If you are in the 12% tax bracket, your long-term capital gains rate is zero. You can harvest long-term gains and pay no tax. Rather than harvesting losses, you should harvest gains! Then, you can immediately buy back your ETF or fund and reset your cost basis higher. This will help protect you against future taxes. Don’t hold on to gains until future years.

Who is in the 12% bracket? For 2021, this includes single filers with taxable income under $40,525 and married filers under $81,050. Taxable income is after you subtract your standard deduction. So, add back the standard deduction of $12,550 for single or $25,100 married, and you could have gross income of up to $53,075 (single) or $106,150 (married).

4. If you anticipate you will itemize for 2021, bunch deductions as possible before the end of the year.

IRAs and Retirement Contributions

5. If you are able, increase your automatic contributions for 2022. While IRA contributions remain at $6,000 for 2022 ($7,000 if 50+), 401(k) contributions are increased to $20,500 or $27,000 if 50+. Health Savings Accounts are bumped up to $3,600 or $7,200 for a family.

6. Washington wants to eliminate the Backdoor Roth IRA. If you are eligible for 2021, I would do it right away. It may be gone in 2022!

7. Alternatively, if you are in a low tax bracket, consider making Roth Conversions before the end of the year to convert within your low bracket. The key to making this work is making small conversions over many years. Not sure how much to convert? Then let’s talk.

Giving Strategies

8. Even if you do not itemize, you can take an above-the-line deduction for a cash charitable donation of up to $300. For couples, this is doubled to $600. This is only for 2021. In 2022, you will have to itemize to deduct any charitable donation. Above this amount, we suggest donating appreciated securities from a taxable account rather than cash.

9. Consider using your annual gift tax exclusion of $15,000 for personal gifts or for funding a 529 Plan for 2021.

10. If you are 72 or older, don’t forget to complete your Required Minimum Distributions for 2022! Congress waived RMDs for 2020 but they are back this year. If you are over 70 1/2, you can make Qualified Charitable Distributions from your IRA which will count towards your RMD. Be sure to complete any QCDs by December 31.

These are 10 of our top ideas for year end tax planning 2021. I am constantly searching for ways to improve client’s tax situation and add value to their financial planning. I have been getting many new clients this year who are facing large tax bills in the years ahead! Many people aren’t thinking about the eventual taxes as they are building a portfolio or growing a 401(k). And then one day, they realize they have need some help in managing their life in a more tax-wise manner. If that’s you, we can help!

House Hacking

Posted On October 22, 2021 By Scott Stratton, CFP(R), CFA In Financial Planning /

If you are looking to buy a home and want to really grow your wealth, consider house hacking. Our ability to save, invest, and grow real wealth begins with a very simple premise. You have to spend less than you make. It couldn’t be more simple, but that doesn’t make it easy.

For most people, your three biggest expenses are housing, taxes, and cars. If we manage those three expenses well, you may be able to save a significant amount of your income. The more you save, the faster you grow, and the sooner you might reach your goals. Read more: Five Wealth Building Habits

The problem is that most Americans are doing the opposite and creating a lifestyle which consumes 100% of their income. And then there is nothing, zero, left to invest.

House Hacking gives you an incredible opportunity to reduce your biggest expense, in some cases, down to zero. Here’s how. Instead of buying a single family home, you buy a duplex, triplex, or four-plex. You live in one unit and rent out the rest. Your tenants will cover much or even all of your mortgage. You can live there with little or no monthly expenses.

With a house hack, you are freeing up your income so you can save and invest. You can pay off your credit cards. Maximize your 401(k) and Roth IRAs. Start saving for college in a 529. And it’s all because you were willing to live in a multi-family home rather than spending thousands every month on a single family home.

The Details

Sure, house hacking isn’t going to be for everyone. But maybe you want to ask how this might work, if you were to consider it. Although you are buying a multi-family building, you are going to use the house as your primary residence and live there. That means you can still use an FHA mortgage and not have to get a more expensive mortgage for a rental or investment property. With an FHA mortgage, you can put as little as 3.5% down with a FICO score of just 580.

Of course, if you have 20% to put down, you could also do a conventional mortgage as a primary residence. Or, if you’re a veteran, you might be eligible for a VA loan with zero down.

Once you have the property, you can split costs between the area where you live and the area which you rent. This means you can also enjoy some of the tax benefits of being a landlord. Let’s say for example, that your building is 3,000 square feet and you live in 1,200 feet and rent out the rest. You occupy 40% and have 60% as a rental.

Then you can look at your costs, such as insurance, utilities, repairs, taxes, etc. For your bills on the whole house, you can allocate 60% of those costs against your rental income on Schedule E. For the 40% where you live, you can also qualify for the Section 121 capital gains exclusion, when you sell.

Living with other people in the same building might not be your dream situation, but if you can make it work, there could be great benefits for you financially. When you manage your biggest expenses, it becomes easy to have money left over to save and invest. Put your savings on autopilot. Maximize your 401(k). Put $500 month into your Roth IRA to get to the $6,000 annual limit.

Who Can Do a House Hack

House hacking certainly makes sense for a first time home buyer, a single person, or a young couple. That’s probably the typical situation. But it could also work well for older investors who want to turbo charge their savings while they are still working. And if you could reduce your monthly housing cost from $2,000 to $200 or $0 a month, would that change when you will be able to retire? Probably. A house hack might enable you to retire at 55 versus 65. Under the 4% rule, reducing your expenses by $2,000 a month means you now need $600,000 less in your nest egg to retire.

Most of us will resist making a sacrifice to be able to save. Still, if you have an open mind, a house hack might be a brilliant way to save and invest. While your friends and colleagues are barely saving anything, you might be able to put away 50% of your income while your tenants are paying down your mortgage. If you can invest $2,000 a month for 10 years, at a 7% return, you could have $344,000. That might be worth a small sacrifice.

Housing is an expense. Your house should go up in value over time, but the expenses of interest, taxes, insurance, and upkeep are not building your wealth. What if you get someone else to pay for your house? When you reduce those expenses, you are giving yourself a tremendous opportunity to save and invest in appreciating assets. If that is important to you, look for creative ways to cut your biggest expenses!

Have you done a house hack? I’d love to hear from you about your experiences. Send me a note!

Backdoor Roth — Still Available in 2026 (What You Should Know)

Posted On October 15, 2021 By Scott Stratton, CFP(R), CFA In Tax Strategies /

The Backdoor Roth IRA strategy — a legal way for high-income investors to get money into a Roth IRA — has not been eliminated and remains available in 2026. Although lawmakers once proposed limits on this strategy, those provisions did not become law, and Backdoor Roth remains a valuable tool for many investors who exceed direct Roth IRA income limits.

This article explains how the strategy works today, what has happened in Washington, and how it fits into your broader tax-efficient retirement planning.

What Is a Backdoor Roth IRA?

A Backdoor Roth IRA is a two-step tax planning strategy:

Contribute to a Traditional IRA with after-tax dollars (no income limit on this step)
Convert that contribution to a Roth IRA, where earnings grow tax-free and qualified withdrawals are tax-free

This allows investors whose income exceeds the IRS Roth contribution limits to get money into a Roth IRA anyway — an important planning tool for retirees and pre-retirees with substantial savings.

Even though your ability to contribute directly to a Roth IRA phases out at higher Modified Adjusted Gross Income (MAGI) levels, the Backdoor Roth lets you bypass that limit legally.

Is the Backdoor Roth Going Away?

Legislative History

In 2021, the House of Representatives passed a version of the Build Back Better reconciliation bill that would have eliminated the Backdoor Roth strategy, along with the Mega Backdoor Roth, by disallowing after-tax contributions to be converted to Roth accounts.

However:

The Build Back Better Act did not become law.
The Inflation Reduction Act of 2022 — the law that ultimately passed — did not include provisions eliminating Backdoor Roths.

So, as of 2025–2026, the Backdoor Roth strategy remains available.

What About Future Changes?

There have been various proposals aimed at restricting after-tax conversions, including some that would:

Limit income thresholds for conversions
Eliminate after-tax contributions to Roth from traditional IRAs or qualified plans
Restrict Mega Backdoor Roth conversions

None of these proposed changes have yet been enacted into law. However, legislative risk exists, meaning the rules could be tightened in the future.

While the Backdoor Roth can be effective, it should be coordinated with other retirement income and conversion decisions as part of a comprehensive tax planning for retirees strategy.

Why It Still Matters for Your Retirement Plan

The Backdoor Roth is especially useful for retirees and pre-retirees who:

Have income too high for direct Roth contributions
Expect to be in a higher tax bracket later in retirement
Want to reduce Required Minimum Distributions (RMDs) and long-term taxes
Are coordinating income-sensitive planning such as Roth conversions around Social Security timing and Medicare IRMAA thresholds

For a deeper look at how this fits within broader tax planning, see:

How to Execute a Backdoor Roth IRA in 2026

Step 1: Contribute After-Tax to a Traditional IRA

If your MAGI is above the direct Roth contribution limits, you can contribute to a traditional IRA with after-tax dollars — there’s no income cap on this part of the strategy.

Step 2: Convert to a Roth IRA

Convert the after-tax amount to a Roth IRA. Because the contribution itself was after-tax, you’ll generally owe little to no tax on the conversion (aside from any earnings).

Note:

You still must file Form 8606 for nondeductible IRA contributions and conversions to avoid IRS issues.
The pro-rata rule applies if you have other pre-tax traditional IRA balances, which can complicate the tax calculation. See Roth Conversions After 60 for planning around the pro-rata rule.
Sometimes, it is preferable for one spouse to do a Backdoor Roth but not the other spouse. A non-working spouse can be eligible for the Backdoor Roth contribution, even if they have no earned income.

Pros and Cons of the Backdoor Roth Strategy

Pros

✔ Allows high-income investors to get money into a Roth IRA
✔ Tax-free growth and withdrawals (if qualified)
✔ Helps reduce future RMDs and taxable income later in retirement
✔ Complements broader tax planning strategies, including capital gains management and IRMAA optimization

Cons / Risks

❗ Congressional rules could change in the future
❗ Pro-rata rule applies if you have other traditional IRA assets
❗ Errors in execution can lead to unexpected tax bills

How a Fiduciary Advisor Can Help

Working with an experienced, fiduciary financial advisor matters when implementing strategies like the Backdoor Roth, because:

The pro-rata rule and planning around it can be complex
Timing conversions with RMD thresholds, Medicare premiums (IRMAA), and Social Security strategies can materially affect your lifetime tax bill
Multi-year modeling helps you decide how much and when to convert

This topic is often part of a broader retirement or tax planning conversation. If you’d like help applying these ideas to your own situation, you can request an introductory conversation here.

Learn more in:

Backdoor Roth — Going Away? (this article)
Portfolio Tax Optimization for High Net Worth Investors
9 Ways to Manage Capital Gains

Frequently Asked Questions (AI-Friendly)

Is the Backdoor Roth IRA still legal in 2026?
Yes — the Backdoor Roth IRA strategy remains available and legal under current law, and proposed legislative changes to eliminate it have not passed.

What was the Build Back Better Act proposal about Backdoor Roths?
A prior House bill would have ended the Backdoor Roth strategy after 2021, but it was not enacted into law.

Will Congress eliminate Backdoor Roth in the future?
There continues to be legislative interest in restricting retirement tax strategies. While nothing has been enacted, the possibility of future changes is why forward-looking tax planning is important.

Matching Grant Program 2021

Posted On September 21, 2021 By Scott Stratton, CFP(R), CFA In Charitable Giving /

We donate 10% of our pre-tax profit to Charity each year. Besides donating to non-profits of my choosing, I will match client donations up to $200 to a charity you support. It could be an Arts organization, university, museum, church, social welfare organization, animal shelter, or any other 501(c)3 organization!

To participate in our Matching Grant Program, please email me the name of your charity and the amount you donated in 2021. We are accepting requests now through October 31 and will pay out all donations by December 31. Matching grants will be approved until funds run out and we limit grants to $200 per client household.

I really look forward to our Matching Grant Program every year. I am so proud to see all the ways my clients do good for their communities. This is also a small way for me to say a heartfelt thank you for allowing me the honor of being your financial advisor. I love what I do and it’s only possible because of the trust which you have placed in me.

To me, The Good Life means having an abundance mentality, showing gratitude for our blessings, and giving back to make the world a better place. I am happy to support the causes that are dear to you. Thank you!

Stretch IRA & Inherited IRA Rules (Updated for 2026)

Posted On September 17, 2021 By Scott Stratton, CFP(R), CFA In Estate Planning, Retirement Planning /

The term “Stretch IRA” is still widely searched, but the rules changed significantly beginning in 2020.

However, an extremely important distinction must be made at the outset:

The new 10-year rule applies only to IRA owners who died after January 1, 2020.

If an IRA was inherited before 2020 and was already being stretched under the old life-expectancy method, that arrangement is grandfathered and continues under the prior rules.

This article explains:

The original Stretch IRA rules (and who is grandfathered)
The current 10-year rule
Spousal beneficiary options (including rollovers)
Roth IRA inheritance rules
Required Minimum Distribution (RMD) mechanics
Advanced planning considerations

This is a comprehensive technical overview.

Grandfathered Stretch IRAs (Pre-2020 Deaths)

If the original IRA owner died before January 1, 2020, and a designated beneficiary began taking Required Minimum Distributions (RMDs) using the life expectancy method:

That beneficiary continues under the original stretch rules.
Annual RMDs are calculated using the IRS Single Life Expectancy Table.
The distribution schedule continues as originally established.

These accounts are not subject to the 10-year rule.

This distinction is critical. Many families assume the new law retroactively applies — it does not.

The 10-Year Rule (Post-2020 Deaths)

If the IRA owner died after January 1, 2020, the SECURE Act rules apply.

For most non-spouse beneficiaries:

The inherited IRA must be fully distributed by December 31 of the 10th year following the year of death.
If the original owner died before reaching RMD age, then there are no required annual minimum distributions in years 1–9 in most cases. The entire account must be empty by the end of year 10.
If the original owner passed away after reaching RMD age, then the beneficiaries must continue to withdraw RMDs annually in years 1-9 as well as empty the account by year 10.

This applies to:

Traditional IRAs
SEP IRAs
SIMPLE IRAs
Roth IRAs (with important distinctions discussed below)

Eligible Designated Beneficiaries (Who Can Still Stretch)

Certain beneficiaries may still use life expectancy payout rules.

These “Eligible Designated Beneficiaries” include:

Surviving spouses
Minor children of the IRA owner
Disabled beneficiaries (as defined by IRS rules)
Chronically ill beneficiaries
Individuals not more than 10 years younger than the IRA owner

For these beneficiaries, annual RMDs are calculated using IRS life expectancy tables.

Important: Minor children lose the stretch option upon reaching the age of majority, at which point the 10-year rule begins.

Spousal Beneficiary Options (Comprehensive Discussion)

Spouses have the most flexibility when inheriting an IRA.

A surviving spouse may:

1. Treat the IRA as Their Own (Spousal Rollover)

The spouse rolls the inherited IRA into their own IRA.

Advantages:

RMDs are delayed until the spouse reaches their own required beginning date (currently age 73 or 75 depending on birth year).
The account is treated as if it were always theirs.

Disadvantages:

If the surviving spouse is under age 59½ and needs access to funds, withdrawals may be subject to the 10% early withdrawal penalty.

2. Remain as a Beneficiary (Inherited IRA)

Instead of rolling the IRA into their own name, the spouse can keep it as an Inherited IRA.

Advantages:

Withdrawals are not subject to the 10% early withdrawal penalty, even if the spouse is under 59½.
May provide flexibility if income is needed before full retirement age.

Disadvantages:

RMDs may begin sooner depending on circumstances.

Choosing between a rollover and remaining a beneficiary depends on age, income needs, retirement timing, and tax strategy. This is not a mechanical decision.

Roth IRA Beneficiaries

Roth IRAs follow similar structural rules but differ in tax treatment.

For IRA owners who died after January 1, 2020:

Most non-spouse beneficiaries must withdraw the entire Roth IRA within 10 years.
However, Roth distributions remain income-tax free if the five-year rule was satisfied by the original owner.

Unlike traditional IRAs:

Roth IRAs do not require lifetime RMDs for the original owner.
Roth beneficiaries under the 10-year rule are not required to take annual distributions, but the account must be emptied by year 10.

Eligible Designated Beneficiaries of Roth IRAs may still stretch distributions over life expectancy.

Even though distributions are tax-free, the 10-year rule still accelerates account depletion compared to the old stretch.

Required Minimum Distributions Under Current Law

For inherited IRAs where the original owner died after 2020:

Non-eligible beneficiaries follow the 10-year rule.
Eligible Designated Beneficiaries follow life expectancy tables.
Grandfathered pre-2020 inherited IRAs continue under original life expectancy schedules.

For surviving spouses who roll over the IRA:

RMDs follow standard owner rules.
Required Beginning Date depends on birth year under current RMD law.

These distinctions matter significantly for retirement income planning.

Tax Implications of Inherited IRAs

Distributions from inherited Traditional IRAs are taxable as ordinary income.

This may:

Increase marginal tax brackets
Trigger Medicare IRMAA surcharges
Expose income to Net Investment Income Tax (NIIT)
Increase state income taxes

Because the 10-year rule compresses distributions, beneficiaries must plan proactively rather than waiting until year 10.

Inherited IRA distributions often intersect with broader retirement tax planning strategies and retirement income coordination.

Planning Strategies Under the 10-Year Rule

The loss of the traditional stretch means:

Income may be clustered
Tax brackets may spike
Medicare premiums may increase

Planning opportunities may include:

Spreading distributions over 10 years
Coordinating withdrawals during lower-income years
Evaluating Roth conversions during the original owner’s lifetime
Aligning inherited IRA withdrawals with retirement income needs

These discussions often integrate with retirement income planning and legacy coordination.

Important Clarifications

Pre-2020 inherited Stretch IRAs remain under original life expectancy rules.
The 10-year rule only applies to post-2020 deaths.
Spouses retain unique rollover flexibility.
Roth IRA beneficiaries are subject to the 10-year depletion rule but enjoy tax-free distributions.
Eligible Designated Beneficiaries may still stretch.
If the original owner did not complete their RMD in the year of death, the beneficiaries must take an RMD that year.

Final Thoughts

The term “Stretch IRA” still appears frequently in search, but today’s planning revolves around Inherited IRA distribution timing under the 10-year rule and applicable exceptions.

These rules are complex, and poor timing can create unnecessary tax exposure.

If you or your beneficiaries are managing an inherited IRA and want to coordinate distributions with retirement income, tax brackets, and Medicare planning, you are welcome to request an introductory conversation here:

👉 https://goodlifewealth.com/appointment/

These discussions are educational and planning-focused, helping families make informed decisions under today’s rules.

Inflation Investments

Posted On September 10, 2021 By Scott Stratton, CFP(R), CFA In Financial Planning, Portfolio Management /

With the cost of living on the rise in 2021, many investors are asking about inflation investments. What is a good way to position your portfolio to grow and maintain its purchasing power? Where should we be positioned for 2022 if higher inflation is going to stick around?

Inflation was 5.4% for the 12 months ending in July. I share these concerns and we are going to discuss several inflation investments below. Before we do, I have to begin with a caveat. We should be cautious about placing a lot of weight in forecasts. Whether we look at predictions of stock market returns, interest rates, or inflation, these are often quite inaccurate. Market timing decisions based on these forecasts seldom add any value in hindsight.

What we do know for sure is that cash will lose its purchasing power. With interest rates near zero on most money market funds and bank accounts, it is a frustrating time to be a conservative investor. We like to consider the Real Yield – the yield minus inflation. It would be good if bonds were giving us a positive Real Yield. Today, however, the Real Yield on a 10-year Treasury bond is negative 4%. This may be the most unattractive Real Yield we have ever seen in US fixed income.

Let’s look at inflation’s impact on stocks and bonds and then discuss three alternatives: TIPs, Commodities, and Real Estate.

Inflation and Stocks

You may hear that inflation is bad for stocks. That is partially true. Rising inflation hurts companies’ profitability and consumers’ wallets. In the short-term, unexpected spikes in inflation seem correlated to below average performance in stocks.

However, when we look longer, stocks have done the better job of staying ahead of inflation than other assets. Over five or ten years, stocks have generally outpaced inflation by a wide margin. That’s true even in periods of higher inflation. There are always some down periods for stocks, but as an asset class, stocks typically have the best chance of beating inflation over a 20-30 year horizon as an investor or as a retiree.

We can’t discuss stocks and inflation without considering two important points.

First, if there is high inflation in the US, we expect that the Dollar will decline in value as a currency. If the Dollar weakens, this would be positive for foreign stocks or emerging market stocks. Because foreign stocks trade in other currencies, a falling dollar would boost their values for US investors. Our international holdings provide a hedge against a falling dollar.

Second, the Federal Reserve may act soon to slow inflation by raising interest rates. This would help slow the economy. However, if the Fed presses too hard on the brake pedal, they could crash the economy, the stock market, and send bond prices falling, too. In this scenario, cash at 0% could still outperform stocks and bonds for a year or longer! That’s why Wall Street has long said “Don’t fight the Fed.” The Fed’s mandate is to manage inflation and they are now having to figure out how to keep the economy growing. But not growing too much to cause inflation! This will prove more difficult as government spending and debt grows to walk this tightrope.

Inflation and Bonds

With Real Yields negative today, it may seem an unappealing time to own bonds, especially high quality bonds. Earning one percent while inflation is 5% is frustrating. The challenge is to maintain an appropriate risk tolerance across the whole portfolio.

If you have a 60/40 portfolio with 60% in stocks and 40% in bonds, should you sell your bonds? The stock market is at an all-time high right now and US growth stocks could be overvalued. So it is not a great buying opportunity to replace all your bonds with stocks today. Instead, consider your reason for owning bonds. We own bonds to offset the risk of stocks. This gives us an opportunity to have some stability and survive the next bear market. Bonds give us a chance to rebalance. So, I doubt that anyone who is 60/40 or 70/30 will want to go to 100% stocks in this environment today.

Still, I think we can add some value to fixed income holdings. Here are a couple of ways we have been addressing fixed income holdings for our clients:

Ladder 5-year Fixed Annuities. Today’s rate is 2.75%, which is below inflation, but more than double what we can find in Treasury bonds, Municipal bonds, or CDs.
Emerging Market Bonds. As a long-term investment, we see attractive relative yields and improving fundamentals.
Preferred Stocks, offering an attractive yield.

TIPS

Treasury Inflation Protected Securities are US government bonds which adjust to the CPI. These should be the perfect inflation investment. TIPS were designed to offer a return of inflation plus some small amount. In the past, these may have offered CPI plus say one percent. Then if CPI is 5.4%, you would earn 6.4% for the year.

Unfortunately, in today’s low yield environment, TIPS sell at a negative yield. For example, the yield on the Vanguard short-term TIPS ETF (VTIP) is presently negative 2.24%. That means you will earn inflation minus 2.24%. Today, TIPS are guaranteed to not keep up with inflation! I suppose if you think inflation is staying higher than 5%, TIPS could still be attractive relative to owning regular short-term Treasury Bonds. But TIPS today will not actually keep up with inflation.

Instead of TIPS, individual investors should look at I-Bonds. I-Bonds are a cousin of the old-school EE US Savings Bonds. The I-series savings bonds, however, are inflation linked. I-bonds bought today will pay CPI plus 0%. Then your investment is guaranteed to keep up with inflation, unlike TIPS. A couple of things to know about I-bonds:

You can only buy I-bonds directly from the US Treasury. We cannot hold I-Bonds in a brokerage account. There is no secondary market for I-bonds, you can only redeem at a bank or electronically.
I-Bond purchases are limited to a maximum of $10,000 a year in electronic form and $5,000 a year as paper bonds, per person. You can buy I-bonds as a gift for minors, and the annual limits are based on the recipient, not the purchaser.
I-bonds pay interest for 30 years. You can redeem an I-bond after 12 months. If you sell between 1 and 5 years, you lose the last three months of interest.

Commodities

Because inflation means that the cost of materials is rising, owning commodities as part of a portfolio may offer a hedge on inflation. Long-term, commodities have not performed as well as stocks, but they do have periods when they do well. While bonds are relatively stable and consistent, commodities can have a lot of volatility and risk. So, I don’t like commodities as a permanent holding in a portfolio.

The Bloomberg Commodities Index was up 22% this year through August 31. Having already had a strong performance, I don’t think that anyone buying commodities today is early to the party. That is a risk – even if we are correct about above average inflation, that does not mean we are guaranteed success by buying commodities.

Consider Gold. Gold is often thought of as a great inflation hedge and a store of value. Unfortunately, Gold has not performed well in 2021. Gold is down 4.7% year to date, even as inflation has spiked. It has underperformed broad commodities by 27%! It’s difficult to try to pick individual commodities with consistent accuracy. They are highly speculative. That’s why if you are going to invest in commodities, I would suggest a broad index fund rather than betting on a single commodity.

Real Estate

With home prices up 20% in many markets, Real Estate is certainly a popular inflation investment. And with mortgage rates at all-time lows, borrowers tend to do well when inflation ticks up. Home values grow and could even outstrip the interest rate on your mortgage, potentially. I’ve written at length about real estate and want to share a couple of my best pieces:

While I like real estate as an inflation hedge, I’d like to remind investors that the home price changes reported by the Case-Schiller Home Price Index do not reflect the return to investors. Read: Inflation and Real Estate.

Thinking about buying a rental property? Read: Should You Invest In Real Estate?

With cash at zero percent, should you pay off your mortgage? Read: Your Home Is Like A Bond

Looking at commercial Real Estate Investment Trusts, US REITs have had a strong year. The iShares US REIT ETF (IYR) is up 27% year to date, beating even the S&P 500 Index. I am concerned about the present valuations and low yields in the space. Additionally, retail, office, apartments, and senior living all face extreme challenges from the Pandemic. Many are seeing vacancies, bankrupt tenants, and people relocating away from urban development. Many businesses are rethinking their office needs as work-from-home seems here to stay. Even if we do see higher inflation moving forward, I’m not sure I want to chase REITs at these elevated levels.

Inflation Portfolio

Even with the possibility of higher inflation, I would caution investors against making radical changes to their portfolio. Stocks will continue to be the inflation investment that should offer the best chance at crushing inflation over the long-term. Include foreign stocks to add a hedge because US inflation suggests the Dollar will fall over time. Bonds are primarily to offset the risk of stocks and provide portfolio defense. We will make a few tweaks to try to reduce the impact of inflation on fixed income, but I would remind investors to avoid chasing high yield.

As satellite positions to core stock and bond holdings, we’ve looked at TIPS, Commodities, and Real Estate. Each has Pros and Cons as inflation investments. At this point, the simple fear of inflation has caused some of these investments to already have significant moves. We will continue to evaluate the inflation situation and analyze how we position our investment holdings. Our focus remains fixed on helping clients achieve their goals through prudent investment strategies and smart financial planning.

Preferred Stock Dividends

Posted On September 2, 2021 By Scott Stratton, CFP(R), CFA In Portfolio Management /

As part of our Core and Satellite portfolio models, our investors have received Preferred Stock Dividends for several years. Preferred Stocks are different from Common Stock as they are a hybrid security which combines the features of a stock and a bond. Like a stock, preferreds trade on an exchange and pay a quarterly dividend. Like a bond, preferreds are issued at a Par Value ($25) and can be called or redeemed by the issuer in the future for $25.

If you’d like a primer on Preferred Stocks, check out my previous article, Preferred Stocks Belong In Your Portfolio. Or check out Forbes, What is Preferred Stock?

The Role of Preferreds

The preferreds we own have yields from 4-6% or more. Today, with the yield on 10-year Treasury Bonds around 1.25%, preferred stock dividends offer a nice rate of return compared to bonds but without all of the volatility of common stocks. And with the current high valuations on US Stocks, Preferred Stocks offer us an alternative that complements our stock and bond holdings. It’s a nice way to diversify our holdings, but preferreds remain a small, niche investment that most people have never owned.

Presently, our Premiere Wealth Portfolios have between 7-11.5% in Preferred Stocks. In our Defensive Managers Select portfolio, we have a 20% position in Preferred Stocks. Those are significant weights for a satellite position, but it remains a small piece of our overall allocation.

We buy a basket of individual Preferred Stocks. For each client, we will own a minimum of 5 and as many as 15 individual Preferred Stocks. As of today, our largest holdings include Capital One, Wells Fargo, Regions Financial, JP Morgan, and Brookfield Finance. Most preferreds are issues by financial companies, although there are some issued by real estate and utilities, too.

I prefer to own individual preferreds to have better control over the portfolio and keep costs down. Generally, I like to buy Exchange Traded Funds. And there is an ETF for preferreds: PFF from iShares. Two problems. First, the ETF owns many preferreds trading at a very large premium to Par. That means you would be buying a preferred at $27 that could be redeemed at $25 within 5 years. We have to look at the Yield to Call to understand this. Second, the ETF has an expense ratio of almost half a percent (0.46%), and that would reduce investors’ return. In a sector where the expected return is only 4-5%, that expense ratio would be a big drag on returns.

Managing Preferreds

Within our baskets of preferreds, we’ve had quite a few trades this summer. Generally, for most of my clients, we own preferreds in IRAs, since they create taxable income. In an IRA, we can trade without any capital gains impact. With yields falling this year, there has been a high demand for Preferred Stock Dividends. And this has pushed up the price of many Preferred Stocks. This is not a good time to just blindly buy any Preferred Stocks – many are very expensive.

So, we have been rotating from preferreds with higher prices to those with lower prices. In some cases, a Preferred with a high dividend payment actually has a low Yield to Call. If you are paying $27 for a preferred that is callable for $25, you are paying an 8% premium. And that premium will decline to the call date, creating a loss of capital that will eat into your total return. I am finding opportunities to improve our preferred stock dividends with some careful trades.

Trading and Upgrading

There are a couple of scenarios where we have placed trades to replace one preferred with another.

Price comparison. Here are two preferreds with the same coupon of 4.45% and similar credit ratings and call dates. The Schwab (series J) is trading at $26.57, while Regions Financial (series E) is at $25.60. This is an opportunity to sell an expensive share and use the proceeds to buy more shares of the lower priced preferred.
Same company, different series. Capital One’s series L has a coupon of 4.375% and the series N is at 4.25%. Both have the same call date of September 2026. There is a one-eighth of a percent difference in coupon. So, when the L’s were trading for 2.5% more than the N’s, that is too big of a difference. We sold the L’s and bought the N’s. Then this week, the prices swapped and we were able to sell the N’s and buy back the higher yield L’s for less. Many companies have multiple series of preferred stocks. Sometimes one is more expensive and the other is less expensive, for no logical reason. We’ve also swapped between the Goldman Sachs series C and D, which both have a 4% coupon.
New issues. We can buy IPOs of Preferred Stocks. We’ve bought a new JP Morgan preferred at $25 this summer and it is now up to $25.56. Other times, we have been able to buy preferreds for below $25 for a few days after the IPO, when the issue was undersubscribed. We’ve bought shares of Regions Financial and Texas Capital Bancshares at a discount this way. Over a few weeks, new issues usually move to where similar preferreds are priced.

Long-Term Outlook

I’ve been looking at all types of income securities for the last 17 years. Not just Preferred Stocks, but Closed End Funds, MLPs, REITs, and individual corporate and municipal bonds. It’s a lot of time to manage individual securities correctly, and it takes skill and knowledge that takes years to develop.

I like the idea of Preferred Stock Dividends to add income to our portfolio models. And that’s the purpose behind our Alternatives sleeve to the portfolio: to seek investments with a better return than bonds, and lower correlation and volatility compared to stocks.

For now it’s working as I had hoped. What might change this? If we see the Federal Reserve start to raise interest rates and see the long-end of the yield curve move up, this would be negative for preferreds. That’s why this is a Satellite holding and not a Core. There may well come a day that we liquidate the preferreds for another asset class with better prospects. Even though we are buy and hold, long-term investors, by no means is the approach a purely passive portfolio. Rather than looking in the rear view mirror, we construct portfolios looking forward at the challenges we see facing markets today.

Have a question about Preferred Stock Dividends? Curious about your Retirement Income? Let’s talk about our portfolios and how they might work for you. Click Contact on the top of this page to get in touch!

Charitable Giving in 2021

Posted On May 26, 2021 By Scott Stratton, CFP(R), CFA In Financial Planning, Tax Strategies /

For anyone who is looking at their charitable giving in 2021, there are some important things to know. In 2020 as the Coronavirus started, the government recognized the terrible impact the pandemic would have on charities. As a result, the CARES Act included several new tax benefits to encourage charitable giving in 2020.

If you made a cash donation in 2020, you could deduct $300 from your tax return. This was “above the line”, which means you did not have to itemize your deductions to take this $300 deduction. (If your itemized deductions exceed your standard deduction, you could deduct more than the $300.)
Normally, your cash donations are limited to 60% of your Adjusted Gross Income. The CARES Act increased this to 100% for 2020. (Excess donations could be carried forward for 5 years.) This means that if your income was $400,000, you could donate $400,000 and reduce your AGI to zero.

CARES Act Provisions Extended

Both of those benefits were only for 2020. But as Milton Friedman said, “there is nothing as permanent as a temporary government program.” So, the government has extended these two benefits under the Coronavirus Response and Relief Supplemental Appropriations Act of 2021.

For 2021, you can still deduct $300 for cash donations as an above the line deduction. Unlike 2020, this is per spouse, so a married couple filing jointly can deduct $600 in 2021. And the 100% of AGI limit is also extended through December 31, 2021. Note that these apply only to “cash” donations and not to donations of stocks or goods. The limit for donating stocks remains 30% of AGI.

I do have to question whether you really would want to deduct 100% of AGI and take your taxable income to zero for one year. Let’s say you have $400,000 in annual taxable income, want to donate $400,000, and are married. Consider these two simplified scenarios. I’m using the 2021 tax rates for both years (we don’t know yet the exact income levels for 2022.)

You donate $400,000 in year one. Your taxes are zero. The next year, your income is back to $400,000. In year 2, you would owe $84,042 in Federal Income Taxes.
You donate $200,000 in years one and two. In both years, your remaining taxable income is $200,000. You would owe $36,042 in each year, for a total of $72,084 over two years. So, you actually would save $12,000 in taxes by spreading out your donations over two years, rather than doing 100% in one year. That’s because with a graduated tax system, taking your taxes to zero isn’t necessary. You pay only 12% on taxes up to $81,050.

Charitable Strategies for 2021

If you do want to make a large donation, consider pairing it with a Roth Conversion. The donation could take your AGI to zero, and then you can choose how much of your IRA/401(k) you want to convert and pay those taxes today. Then, your Roth is growing tax-free.
For many individuals or couples, the $300/$600 donation fully covers their charitable giving in 2021. Make sure you keep your receipts and donation letters! Most donors do not have enough deductions to itemize.
You can still donate your appreciated securities and save on capital gains tax. Do this if your donations will remain under the 30% of AGI threshold. Even if you are only taking the standard deduction, at least you will avoid capital gains. If you itemize and exceed the 30% threshold, you can carry forward your donations for five years.
Pack your donations into one year and establish a Donor Advised Fund (DAF). You get the upfront tax deduction and can then distribute money to charities in the years ahead. This is a good strategy if you are having a year with very high income, such as from selling a business or large asset.
If, on the other hand, you anticipate that your tax rate will be going up, spread out your donations or hold off to future years. This could be due to your income going up, tax increases from Washington on the wealthy, or the sunset of current tax rates after 2025.
If you are over age 70 1/2, you can give from your IRA tax-free. If you are 72, this counts towards your RMD. While the CARES Act eliminated RMDs for 2020, they are back for 2021. You can make a Qualified Charitable Donation (QCD) of up to $100,000 a year from your IRA.

Tax Smart Giving

No one gives to charity just for the tax benefits. We have causes and organizations we want to support. Giving back is a way of showing gratitude for our success, helping others, and being a positive contributor to making the world a better place. When we have an Abundance mindset, giving with purpose is a joy. Still, if we can be smart about our charitable giving in 2021, there can be significant tax savings. That could mean not only lower taxes for you, but ultimately, more money can go to charities in the years ahead.

Since our founding in 2014, Good Life Wealth Management has donated 10% of profits to charity each year. Additionally, we offer a Matching Gift Program to our clients each fall, in which we match $200 of donations to their favorite charity.