By Tom Sedoric

Would you like to hear the good news or the bad news first?

Let me start with the bad news.  Investment returns are likely to moderate and taxes are very likely to rise.

Do you want to know the good news?  There are always ways to manage these shifting sands.

We will remember the Covid-19 pandemic as a life-altering event which has indelibly shaped our own unique experiences and adaptations. We witnessed at the same time the unimaginable failure by our federal government to deal with the pandemic and the remarkable resilience by tens of millions of Americans trying to map a cautious path to minimize the tragedy and chaos. As a society, we were forced to enter a steep learning curve on how to work, teach, and socialize differently. We mourned and celebrated events in ways that would have been considered “science fiction-like” a year ago.

While this pandemic experience has not been easy, nearly every element of our economy was forced to adapt on the fly with entrepreneurial innovation on a massive scale. Zoom meetings, remote education, telehealth visits, outdoor dining, virtual conferences, and rearranged supply chains became the necessary coin of the realm. Underlying trends already in motion were expedited suddenly, and at a rapid pace, instead of gradually.

While there is still much uncertainty about the duration of the pandemic, hope has arrived in the form of multiple vaccines and an incoming administration publicly focused on confronting the pandemic head on. These trends could produce a return to some kind of social and economic normalcy within a few years, but not immediately.

As an efficient team, we began to work remotely from our home “offices” since last March and we plan to continue to do so for the foreseeable future. But in our transformation, we have increased our communications with our clients more than ever before. As always, we continued to address the fundamentals of prudent planning and management and offering our judgment.  We know that in every crisis lies opportunity – and the pandemic of 2020-21 will prove to be no exception. Our practice has grown dramatically despite the challenges we face.

Making the most of any opportunity requires discipline, self-awareness of risk tolerance, and a realization that the unfolding future may require some altering of expectations. It is clear that unexpected events have exacerbated headwinds such as low interest rates, underfunded budget deficits, and increased socioeconomic inequality in ways which we believe will eventually lead to higher tax rates.

A prudent assumption is one our clients have heard for a while: expect returns to be lower. We presume that historically low interest rates will not be rising significantly anytime soon as the economy remains in recovery mode. Equity valuations are extended; annuities and insurance companies are experiencing a world of hurt with low interest rates. It is time to tough it out, friends.

We will focus less on returns and instead adhere to the fundamental virtue of what we can control to improve outcomes. Planning for the rise of taxes over time is not an option - it is a necessity.  With prudent tax planning one can compensate for lower returns. The following examples of actions we can take, such as the importance of tax efficiency, may not be headline grabbers but they are critical fundamentals to navigating unchartered waters.

  • Tax Loss Harvesting and Swaps. The onset of the pandemic in the spring, provided an ideal environment for tax loss harvesting and swaps. Many of our clients benefited from realized losses to help offset future realized gains and were able to fully participate in the recovery.
  • Roth IRA Conversions. The elimination of the stretch IRA feature for IRA beneficiaries, courtesy of the SECURE Act, combined with the prospect of higher tax rates in the future creates a unique opportunity for Roth IRA conversions.
  • Philanthropy. There are various ways to fulfill your charitable desires while also reducing taxable income.
  • Spending. Calculate the impact high cash expenditures such as secondary homes or new automobiles. Does the need or, as is often the case, the want justify the expense?
  • Risk tolerances. It never hurts to reassess your risk parameters and adjust your plan accordingly.

We are challenged with a different future that few could have imagined when 2020 dawned. As with business and sports, the fundamentals of success are tried and true and often get too little attention.

“The best way to measure your investing success is not by whether you’re beating the market but by whether you’ve put in place a financial plan and a behavioral discipline that are likely to get you where you want to go,” said Benjamin Graham, the legendary 20th Century American economist and mentor to folks like Warren Buffett, Jeremy Grantham, and us.

We wholeheartedly agree.

Any opinions are those of the author and not necessarily those of Raymond James. Unless certain criteria are met, Roth IRA owners must be 59 ½ or older and have held the IRA for five years before tax-free withdrawals are permitted. Additionally, each converted amount may be subject to its own five-year holding period. Converting a traditional IRA into a Roth IRA has tax implications. Investors should consult a tax advisor before deciding to do a conversion. Neither Raymond James Financial Services nor any Raymond James Financial Advisor renders advice on tax issues, these matters should be discussed with the appropriate professional.