WindsorBrief for February 2021
Investing:2021 is off to a mixed start
Planning:Saving & retirement plan contributions
This edition of the WindsorBrief reviews the start to 2021 and discusses the outlook ahead.
In addition, this month’s planning discussion is an overview and reminder to fund your savings, education, and retirement accounts. The beginning of the year is the perfect time to make sure your plans are in place and your savings are on track.
Investing: 2021 is off to a mixed start
The start to 2021 has been shaped by volatility. The first part of January started strong, only to reverse course the last week of the month. This recent weakness followed the S&P 500’s best performance ever between election day and inauguration day of +14.3%. Corrections in the stock market, while they can be unsettling, are healthy in the longer term. The underlying economy is still in recovery mode, and there are tangible reasons to expect 2021 to be a positive year from an economic viewpoint.
Overall, the month of January delivered a loss of 1.93% for the S&P 500 and the International markets similarly losing 1.45%. In contrast, both small cap US stocks and emerging markets are still positive for the year, as these economically sensitive investments continue to discount the likelihood of an improving global economy. Despite the loss, there are positive tail winds as we enter February:
- Bullishness over the roll out of the Covid-19 vaccine
- Signs that “wave 3” of the pandemic was beginning to slow
- Optimism for additional fiscal stimulus
- Better than expected company earnings announcements indicative of continued economic upside
- Confirmation from the Federal Reserve of continued low interest rates going forward
United States Corona 19-Cases – Change in the 7 Day Average
Source: Covid-19 Project
However, the stock market is rarely a straight line up. January turned out to be a volatile month, as crosscurrents began to form that could forebode volatility over the next few months. We expect these concerns to be largely transient, but we will be monitoring them closely, mindful of opportunities to rebalance. The key items we will be closely monitoring include:
- Pushback in both Congress and the Senate on the final version of the proposed $1.9 trillion stimulus bill
- Concerns about the new strains of Covid-19 and efficacy of the currently approved vaccines
- Potential for accelerating inflation in the coming months
- Any unexpected weakness in important economic indicators
S&P 500 Avg Monthly Performance: First Year of Presidential Cycle (1929-2017)
There continue to be reasons to be optimistic about the future for the economy, society and the stock market as we see a light at the end of the Covid-19 tunnel. The economy continues on a path of improvement but faces a number of hurdles we continue to monitor. Thank you for allowing the Windsor Wealth Management Team to continue to earn your trust and confidence in the services offered to you. We appreciate your loyalty and always welcome your feedback.
Planning: Saving & retirement plan contributions
While you may be anticipating getting back to normal (or a new normal), planning toward your long-term goals continues. Opportunities for planning and savings are based on the rules in existence today. Keeping in mind that adjustments may be needed if any changes are made in Washington to tax rates, allowable contributions, etc. Here is a brief update of the rules as they exist today.
Many options for retirement savings are based on income and IRS limits. Based on your financial scenario, Windsor can help recommend a combination of the following:
- IRA and Roth IRA contribution limits for 2021 remain at $6,000 (plus an additional $1,000 if age 50 and over). You or your spouse must have earned income to be eligible to make IRA contributions. However, having too much income can limit your ability to make Roth IRA contributions or deductible IRA contributions. The ability to make a Roth contribution is phased out based on adjusted gross income between $198,000 – 208,000 for married filing jointly ($125-140,000 for single filers).
- Pre-tax or Roth 401k employee contribution limits for 2021 remain at $19,500 (plus an additional $6,500 if age 50 and over). Some plans also allow for additional employee after tax contributions that can be converted in-plan to Roth accounts. This may be an attractive option for additional saving if your company plan allows this option.
- If you are self-employed or a business owner, Windsor can assist you in setting up your own retirement plan based on your needs. A Solo 401k or SEP IRA can be set up with contributions of up to 20-25% of income with an overall contribution limit of $58,000.
For education saving, consider the benefits of utilizing a 529 account. 529 accounts grow tax deferred, and the earnings can be withdrawn tax-free if used for a qualified education expense. The annual contribution limit per donor, per beneficiary is $15,000 in a single calendar year, utilizing the annual gift exclusion. There are exceptions to this limit, such as funding 5 years of contributions in a single year, but that comes with limitation. Many states also provide state income tax incentives for residents including:
- Indiana provides a state income tax credit on 20% of contributions with a maximum credit of $1,000 per tax return. An Indiana resident can receive the maximum $1,000 state income tax credit on a $5,000 contribution to Indiana 529 accounts.
- Illinois residents receive a state income tax deduction for contributions into the Illinois 529 plan. The deduction is up to $10,000 per year for single taxpayers and $20,000 for married filing jointly.
- New Yorkers can deduct up to $5,000 for single taxpayers ($10,000 married filing jointly) from their state income tax return for contributions into a New York 529 plan.
Even in states like California or New Jersey that don’t offer state income tax benefits or in states without state income taxes, the federal tax benefits still provide a strong tax incentive.
As part of our financial planning process, Windsor can run projections to assist you in determining the monthly saving targets to help you achieve your goals.