Why Strategic Capital Gains Deployment is Essential to Wealth Management and Financial Planning
Buy low and sell high is tried and true investment advice, yet sometimes it is the most difficult to follow. That’s because realizing capital gains in a taxable account means paying tax. Beyond tax treatment, there are a number of reasons to sell holdings and realize gains. Below, we examine a few of the important tax, retirement, wealth management and financial planning considerations that must play into strategic capital gains deployment.
Capital gains tax rates
Depending on filing status and taxable income, long-term capital gains are taxed at either zero, 15 or 20 percent.
- Zero percent: In 2018, married filing jointly taxpayers with taxable income less than $77,200 or single taxpayers with taxable income less than $38,600 will pay no tax on long-term capital gains and qualified dividends. In years when income meets or falls below the zero percent threshold, don’t miss this opportunity to sell out of holdings to divest or rebalance the portfolio, or sell and buy back with higher cost basis with no current tax impact.
- 15 percent: The 15 percent capital gains tax rate applies when taxable income is between $77,200 and$479,000 (married filing jointly) or between $38,600 and $425,800 (single filers). The overall tax could increase to 18.8 percent when factoring in the net investment income tax. This additional tax may kick in when modified adjusted gross income (AGI) reaches the levels of $250,000/$200,000 for married/single.
- 20 percent: Capital gains are taxed at 20 percent for any income over $479,000 (married filing jointly) and $425,800 (single filers). Keep in mind, this rate could increase to 23.8 percent when net investment income tax is applicable.
Quick guide to handling capital gains (or losses)
Highly appreciated stocks held long-term can be donated to charity or a donor-advised fund. Avoid paying capital gains tax on the appreciated security that you have held for more than one year if they are used to make charitable contributions. The contribution deduction is based on the fair market value of the security, subject to certain limitations based on AGI.
Before year-end, compute your year-to-date realized gains and losses from all taxable investment accounts. Consideration should be made for the trade date, mutual fund distributions and income from pass-through entities (including partnerships, S corporations and LLCs). Harvest additional gains or losses before the end of the year to meet investment, tax and financial planning goals.
Your RKL Wealth Management advisor can help you determine the most appropriate method and timing to maximize capital gains and minimize the impact of losses. Below is quick overview of common situations and action items.
|Do you hold…||Action items to consider with advisor:|
|Short and long-term losses?||Recognize unrealized gains by selling securities (ideally short-term holdings) up to $3,000 less than the amount of losses.|
|More long-term gains than short-term losses?||Starting with long-term positions, take losses up to $3,000 more than the net gain. Then follow suit for short-term losses.|
|More short-term gains than long-term losses? Or equal amounts of short and long-term gains?||Starting with long-term positions, take losses up to $3,000 more than the net gain. This provides the benefit of offsetting short-term gains.|
|Bad debts or worthless securities?||Working with your advisor, make sure that losses are deductible in the current year with the proper substantiation.|
Capital gains from mutual fund investments
A mutual fund is required to pass profits back to its investors in the form of ordinary dividends, qualified dividends or capital gains. When the mutual fund sells underlying securities, the gain is passed through to the investor based on the fund’s holding period. The gain may be taxed as ordinary dividends if held for one year or less (subject to ordinary income tax rate) or taxed as capital gain distributions if held for more than one year (qualifies for reduced capital gains tax rate). A mutual fund may decrease in value, but still create taxable income for the investor.
Mutual fund investors should also beware of “buying the dividend.” When mutual fund shares are bought right before its dividend/capital gain distribution, the investor is responsible for paying current tax on it. Check the fund’s distribution schedule and adjust your buying plan to avoid “buying the dividend.”
Capital gains considerations in retirement years
Retirees aged 65 and older must take care when voluntarily increasing adjusted gross income by realizing capital gains. 2018 modified adjusted gross income (AGI plus tax-exempt investment income) will impact the amount that will be paid in 2020 for Medicare premiums. Realizing capital gains can also increase the amount of Social Security benefits that are taxable, which ranges from zero to 85 percent.
Despite these factors, retirement years may be the optimal time to realize capital gains, particularly in those years after earned income has ceased and before required minimum distributions (RMDs) and Social Security benefits begin. RMDs must begin at age 70 ½ (by April 1st of the following year) and Social Security benefits can be delayed until age 70.
Capital gains and your wealth management approach
Knowing your tax situation is only one piece of the puzzle. Your overall financial picture is not complete without cash flow needs, investment objectives, risk profile and legacy goals. Wealth management incorporates these elements along with other financial services into one comprehensive experience. Coordination of investment services and financial planning through a single wealth advisory team avoids the risk of competing investment philosophies and disparate attempts to minimize tax, positioning individuals and families to achieve the strongest results.
In order to meet cash flow needs, invested assets may need to be sold. When identifying the holdings for sale, individuals should consider not only the tax impact, but also the impact to the portfolio performance. Other times, portfolio rebalancing may be required because target allocation has significantly changed. When considering the sale of securities or portfolio rebalancing, remain mindful of the level of risk and the time horizon for your individual investment needs.
A wide variety of investment circumstances may also spur the need for deployment of capital gains. Over-concentration in one investment position may require diversification of holdings, while underlying investment costs may drive an investor to relinquish other holdings. As part of a routine investment analysis, your wealth advisor may recommend eliminating securities with poor performance. Other times, changes in fund manager, company strategy, legal/regulatory standing or company management may be the impetus for a sale.
Gifting appreciated stocks to family members may afford opportunities for legacy planning, in addition to potentially shifting the tax burden to a lower tax bracket. Keep in mind that kiddie tax rules have changed in 2018, thanks to tax reform, with unearned income subject to the estate and trust tax rates rather than the parent’s tax rates.
Your RKL Wealth Management advisor can walk you through the full range of capital gains considerations and devise a deployment strategy that meets your unique investment and financial goals.
Market & Economic Update
By: Nicholas A. Boyer, Chief Investment Officer/Executive Vice President
As we enter the fourth quarter of 2018 amidst the second-longest economic expansion in U.S. history, we believe a meaningful gap remains between perception and reality regarding the health of financial markets and the global economy. Once again, despite rising interest rates, market volatility and tariffs, the latest figures released by the Bureau of Economic Analysis showed real gross domestic product (GDP) increased at an annual rate of 4.2% in the second quarter of 2018 compared to 2.2% in the first quarter. Meanwhile, the Atlanta Federal Reserve Bank’s running estimate of real GDP growth based on available data for the current measured quarter, known as GDPNow, remains at 4.2%. Globally, while international and emerging markets economies generally continue to lag the U.S. in growth and have experienced some softness in data, the global economy remains squarely in expansionary territory by most recent metrics.
Volatility Emerging in Clusters, As Usual
While volatility has again reared its head on increasing investor anxiety around growth, rising rates and U.S. equity valuations, the S&P 500 delivered 7.7% in total return on the quarter, while U.S. mid and small cap stocks (Russell Midcap Index and Russell 2000 Index) posted 4.9% and 3.6% respectively in the third quarter. International equities lagged again with MSCI EAFE returning 1.4% but emerging markets equities fared the worst clipping another -1.0% from the MSCI Emerging Market Index on the quarter. On the fixed income side, interest rates continued to rise and bond portfolios experienced further volatility as the yield on the U.S. 10-year Treasury note ended the third quarter at 3.05%, up over 20 basis points from the end of the second quarter and over 60 bps from year-end 2017, and is trading above 3.1% as of the time of writing.
Believe It or Not, The U.S. Economy Is Still in A Super Cycle
As we’ve noted previously, given the general strength of the U.S. and global economy, it’s clear that a slowdown in global trade due to increasing multilateral tariffs will not end this cycle alone. The U.S. consumer’s pivotal role in the global economy has not changed and consumer confidence and balance sheets remain strong. Meanwhile, the National Federation of Independent Businesses’ (NFIB) September survey posted the third highest reading in the survey’s
45-year history, showing small business owners not only remained optimistic about the nation’s economy but actual capital spending in the prior months rose significantly while owners bulked up inventories and compensation increases set a new record. Additionally, despite significant handwringing from economists, growth in U.S. Labor Productivity (Output Per Hour Nonfarm Business Sector) was confirmed at 2.9% in September, the largest quarterly increase since 1Q2015. We continue to believe the risk of recession remains quite low (see chart).
It’s Still Only the Fed That Can Kill the Cycle
The continued strength of the U.S. economy appears to be pushing Federal Reserve officials down an increasingly hawkish road. The Federal Open Market Committee (FOMC) raised the benchmark fed funds rate by .25% in late September to a range of 2% to 2.25%, and hinted at three more rate increases by June 2019. Further, the recent surge in interest rates shows that investors have clearly begun to believe that Fed Chair Jerome Powell’s view toward “risk management,” as outlined at Jackson Hole, is staunchly and decidedly hawkish as he noted that interest rates are currently “a long way from neutral.” That said, Fed officials continue to closely monitor the flattening yield curve and have even appeared to begin talking investors out of watching the traditional 2-10 year U.S. Treasury spread while trying to focus their attention on the spread between current and future expected Federal Funds Rate.
As we’ve noted, a flattening curve is typical of late-cycle monetary policy tightening and history has demonstrated that as economic cycles progress the Fed’s counter-cyclical impact generally becomes more pronounced. Yet, we note that an inverted yield curve remains the best predictor of a recession and if the Fed continues on its current path it would be difficult to avert a yield curve inversion in 2019. While the primary reason for the Fed to continue to hike aggressively — inflation — has undoubtedly begun to increase, it remains relatively low based on history and even Chair Powell indicated that inflation expectations, which tend to lead actual inflation, “remain well anchored.” Given the current environment and the Fed’s dual mandate of stable prices AND maximum employment, it’s difficult to believe with a high level of confidence that Chairman Powell will continue to tighten monetary policy in the face of increasing U.S. recessionary risks and tightening financial market conditions. Rather, we would expect the Fed to closely monitor financial market conditions, respond to economic data and avoid catalyzing a U.S. economic recession that would in all likelihood spillover into the global economy.
Asset Prices Will Remain Volatile but Absent A Recession Will Continue to Grind Higher
As noted previously, given that global economic growth will likely remain asymmetric and cross-asset correlations should decrease over the near and intermediate term, we continue to expect investors to differentiate accordingly, increasing dispersion of returns among asset classes. Nevertheless, we expect market volatility in both stocks and bonds will increase periodically throughout 2018 and will be closely monitoring the risk of increasing stock/bond correlations. We note that as Goldman Sachs points out, adjusting for a lower equilibrium interest rate in the current environment, the yield on the U.S. 10-Year Treasury at which stock prices and bond prices become negatively correlated is closer to 3.6% than today’s 3.1%.
Ultimately, we believe the strength of the U.S. economy will continue to drive global economic growth and barring rapid tightening of monetary and financial conditions should provide support for global risk assets going forward. We continue to view the U.S. as the most favorable investment environment in the world, and in view of the outlook for corporate earnings we remain positive on U.S. equities. However, we are committed to globally diversified equity portfolios and still see more attractive valuations in international and emerging markets. We are also mindful of risks to bond markets as interest rates continue to rise and will continue to improve and maintain credit quality in our fixed income portfolios. We will closely monitor developments in the economy and encourage our clients to reach out at any time to discuss our strategy and individual circumstances in further detail.
1 “GDPNow.” Federal Reserve Bank of Atlanta, 2018, www.frbatlanta.org
2 “Balancing Act.” Global Macro Conditions, Slide 5. Goldman Sachs Asset Management, Market Strategy, September 2018
3 Bloomberg Market Monitor
4 U.S. Department of The Treasury, Daily Treasury Curve Rates, www.treasury.gov
5 “Household and Nonprofit Organizations; Net Worth, Level.” FRED Economic Data, Federal Reserve Bank of St. Louis, 2018, https://fred.stlouisfed.org
6 Bloomberg Economic Releases: Bloomberg Consumer Comfort
7 “Small Business Optimism Continues Historic Trend.” September 2018 Report, National Federation of Independent Businesses, https://www.nfib/com/surveys/small-business-economic-trends/
8 U.S. Bureau of Labor & Statistics, Major Sector Productivity and Costs, https://data.bls.gov/ /PRS85006092
9 “Balancing Act.” Federal Reserve Forecast, Slide
10 “Balancing Act.” Government Rates and Equity Correlation, Slide 17. Goldman Sachs Asset Management, Market Strategy, September 2018
Updates on RKL Wealth Management Team
By: Laurie M. Peer, CPA, CFP®, RKL Wealth Management President
This fall was a busy time at RKL Wealth Management, with a change in firm leadership and new roles and responsibilities for certain team members.
After 13 years of leading the firm to new heights of success, Sarah Young Fisher has assumed the role of President Emeritus for RKL Wealth Management. This new role allows Sarah to focus full-time on her true passion – client service. In addition to serving the wealth management needs of her clients full-time, we’re also grateful that she’ll serve in an advisor role to the team and impart her business acumen to our next generation of advisors.
I’m both excited and humbled by the opportunity to succeed Sarah as President. Whether it is our recent work to enhance our service delivery model or increased integration with the business advisors at RKL LLP, I’m driven to find new ways to enhance the highly personalized and collaborative client experience that’s long been a hallmark of RKL Wealth Management.
In addition to his oversight of the firm’s investment strategy, we’re also pleased to announce that Nicholas Boyer has taken on a broader leadership role within RKL Wealth Management. In his new role of Executive Vice President/Chief Investment Officer, Nick will direct the firm’s wealth management and financial planning services, play a key role in business development initiatives and continue to lead the firm’s investment team.
Please join me in congratulating the following team members on their new roles:
- Brandon Adams, promoted to Senior Portfolio Manager. Brandon also recently achieved the Chartered Financial Analyst (CFA®) credential which places him among the highest standard of investment management professionals.
- Jeffrey Guindon, promoted to Senior Wealth Advisor.
- Michael Hinerdeer, promoted to Senior Trader.
- Christian Pascuzzo, promoted to Wealth Advisor.
On behalf of the entire RKL WM team, thank you for the trust you place in us to help you achieve your financial goals and, most importantly, your most fulfilling life.
Welcome to RKL WM: David Morais
RKL Wealth Management is proud to announce that David M. Morais, CFP® joined the firm in August as a Senior Wealth Advisor. Specializing in financial, estate and legacy planning for individuals and families, Dave provides highly personalized advice and guidance to help RKL WM clients achieve their financial goals. He also has significant experience advising closely held family businesses on strategic operational or ownership alternatives. Dave has nearly two decades of banking, financial services and wealth advisory experience, most recently with a national wealth management firm. He holds the Certified Financial Planner (CFP®) credential and earned his B.A. in Finance from James Madison University. Dave and his wife live in York, Pennsylvania, with their three children.
Phishing Scams & How To Keep Your Identity Safe
Texts and emails keep us more connected than ever, yet these technologies also make us more vulnerable to scams. Under the anonymous cover of the web, cybercriminals use an elaborate arsenal of methods to commit fraud and steal personal information. Phishing has become one of the most prolific methods because scammers know it’s effective.
What is phishing and how does it happen?
Phishing involves criminals who pose as trusted sources through various media, such as email, phone calls, texts, advertisements and websites, to acquire usernames, passwords, social security numbers, credit card details or other sensitive private information. Phishing can also be used to install malicious software, known as malware, on a computer devise or network to allow the perpetrator to gain access to private information or inflict other damage.
In the past year, we’ve seen numerous clients receive emails that appear to be from Schwab requesting credentials and personal information.
Tips to prevent phishing
At RKL Wealth Management, the security of our clients’ personal information is a top priority. To raise cybersecurity awareness, we rounded up some best practices to defend against phishing emails.
- Hover over links to view the actual URL and verify that it matches or reflects the address from where it came. For example, a link from Schwab should have Schwab’s correct name as part of the link address. Don’t click if it looks suspicious, inconsistent or questionable.
- Be wary when clicking links or attachments within emails and texts, especially when the sender is unfamiliar.
- Be suspicious of emails that have grayed-out “CC:” or “To:” lines, which are signs that these messages may have been sent to a mass distribution list.
- Compare the domain name in the sender’s email address to verify that it matches the expected domain. For example, be suspicious of an address that ends in schwad.com rather than schwab.com.
- Consider turning on spam filters within your email account to help block unsolicited and unwanted messages.
- Do not enter your username and password on any web page that you’ve reached by clicking a link in an email or by copying and pasting an address into your browser. Instead, type the trusted website address directly into your browser and log in to your account as usual.
As always, contact RKL Wealth Management with any questions or if you receive a suspicious email and we will notify Schwab immediately.
The views and opinions expressed are for informational and educational purposes only as of the date of writing and may change at any time based on market or other conditions and may not come to pass. This material is not intended to be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and should not be considered specific legal, investment or tax advice. The information provided does not take into account the specific objectives, financial situation, or particular needs of any specific person. All investments carry a certain degree of risk and there is no assurance that an investment will provide positive performance over any period of time. The information and data contained herein was obtained from sources we believe to be reliable but it has not been independently verified. Past performance is no guarantee of future results.
RKL Wealth Management LLC is a registered investment adviser. To learn more about how we can help you meet your goals, please contact our office at (717) 399-1700 or via our website, rklwealth.com. Additional information is available upon request.
© 2018 RKL Wealth Management LLC – All rights reserved.