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March 2021 Windsor Brief

March 2021 Windsor Brief

| March 05, 2021
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WindsorBrief for March 2021


Investing:Cautious optimism for continued economic recovery
Planning:Roth IRA’s – A good addition to your retirement plan

In this month’s Windsor Brief, we note ongoing signs of economic recovery in the US, as well as in international stocks and emerging markets. We look at factors likely to support that recovery and others that could work against it. We also discuss the recent intense trading in struggling companies like GameStop, and February’s meteoric rise of cryptocurrencies.

Our financial planning discussion focuses on retirement, namely the potential benefits of Roth IRA accounts.

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Investing: Cautious optimism for continued economic recovery

Despite volatility the last week of February, the stock market delivered positive gains for the month of February. These gains were driven by optimism on both Covid-19 and the proposed stimulus bill. Covid-19 cases continue to come down while the number of vaccines administered continues to rise. This is giving rise to hopes for further reopening of the economy. At the same time, the possible approval of a stimulus bill of approximately $1.5 trillion is adding additional fuel to the fire.

Overall, international stocks delivered the strongest performance in February, and for the year-to-date period. Emerging markets are leading this charge, as they were especially hit hard by the economic closures and are now benefitting from the world economies reopening. There are several economic measures that show this, but one of the clearest is the recovery in air travel.


20% Domestic airline passengers (change from previous year)


Source: Capital Group, Bloomberg, Bureau of Transportation Statistics

From an overall economic perspective, recent data shows the economy is healing, despite last month’s increase in US jobless claims and the fall in new housing starts. Some volatility in these economic indicators is normal and not a significant concern, and it is possible that both GDP and S&P earnings could further surprise to the upside this year. In addition, investor confidence is shown through interest rates, which continue to rise. The 10-year treasury bond yield was 1.4% at the end of February; that’s double its level from September 2020. However, this also increases concerns regarding inflation, which has the potential to increase as the economy reopens. Although we are beginning to see evidence of inflation in certain areas, we are still well below full employment, which is a key driver of inflation.

In a concerted effort to keep the economy growing, the Federal Reserve has targeted short-term interest rates to zero, where it expects to keep them for an extended period. However, this has sparked pockets of speculative activity. Such pockets include the unusual trading of troubled companies like GameStop and AMC, as well as in SPACs (“blank-check companies”). Another area is the rise of even the lesser-established cryptocurrencies. Dogecoin, for example, was up 1000% at one point during the month of February (prompted largely by a tweet from Tesla CEO, Elon Musk). These types of trading activities along with higher-than-average valuations are a reminder that risks are always present. We will continue to monitor these risks along with other risk such as interest rates and inflation.

One major risk that is beginning to recede for the time being is Covid-19, as the case counts and hospitalizations have continued to fall quite dramatically.


Source: The Covid Tracking Project

This drop in cases is happening at the same time the vaccine roll-out is beginning to expand. More importantly, a Bloomberg “review of drug makers’ public statements and supply deals” has found that the US could be administering 30 million vaccines a week by June, with enough supply “to give 4.5 million shots a day” by summer. It’s tough to estimate the trajectory of herd immunity, but it’s possible that 90% of US adults could have immunity just as the stimulus discussed above hits. This would be a strong boost to the economy if consumers are able to return to stores and restaurants just as stimulus checks reach their bank accounts.


US Covid Herd Immunity Estimates


Source: Strategas

Expanding on the stimulus plan, it’s important to note that well over half of the proposed stimulus is front-loaded, meaning it will be spent in the first six months. It’s targeted at consumers through direct stimulus payments, enhanced unemployment benefits, and other assistance programs as well as at state and local government.

Under current law, the CBO sees the US budget deficit falling from 14.9% of GDP last year to 10.3% of GDP this year. The inclusion of the Biden stimulus plan would lead to an expected deficit increase for 2021 of 1% of GDP over last year’s levels.

We expect the rest of 2021 to provide opportunities for equity investors in domestic and international markets. Risks to navigate include high stock valuations and pockets of speculative investor behavior. We could also see setbacks in economic improvements, an increase in longer-term interest rates, and the possibility of a breakout in inflation levels. Sticking to a target investment allocation, based on your unique financial goals and a level of risk you find comfortable, is the wisest approach.

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Planning: Roth IRAs – A good addition to your retirement plan


Roth IRAs are favorable if you think you might be in a higher tax bracket during retirement, or if you want to spread taxes out between retirement accounts for more financial flexibility. You fund Roth accounts with after-tax contributions, your earnings grow tax-deferred, and you don’t pay tax on qualified distributions, either.

Roth Contribution Limits

  • Contribution Limit: The 2020 and 2021 contribution limit is $6,000 if you’re under 50, and $7,000 if you’re 50 or older. The deadline for making a 2020 contribution is April 15th, 2021.
  • Contribution Income Limit: To make a contribution, you or your spouse must have earned income. However, if your adjusted gross income (AGI) is over the contribution limit, you cannot make a contribution in the normal way (see below). The AGI limits for contributions in 2020 and 2021 are:
    • 2020
      • Single tax filers – $139,000 (phases out after $124,000)
      • Married filing jointly – $206,000 (phases out after $196,000)
    • 2021
      • Single tax filers – $140,000 (phases out after $125,000)
      • Married filing jointly – $208,000 (phases out after $198,000)

Roth Conversions

  • Back Door Roth: If your AGI is over the normal contribution limit, a “Back Door Roth” could be a good option. In this scenario, you make a traditional, non-deductible IRA contribution, then complete a Roth conversion to transfer the funds to a Roth IRA. If you don’t have any other IRA accounts, you pay no income tax on the conversion. If you do have additional IRA accounts, this strategy won’t work, unfortunately, because they’re all taken into consideration, in line with special IRS pro-rata tax rules.
  • Additional Conversions: There are no income restrictions on converting your other retirement accounts into a Roth IRA. You pay ordinary income tax on the full conversion amount. If you’re in a low tax bracket, it might make financial sense to convert a sum that would fill that bracket up.

Roth Withdrawals

  • Required Minimum Distributions:RMDs are not required for a Roth IRA.
  • Withdrawal Ordering Rules: You can withdraw normal contributions at any time, tax-free, because you made them after tax. Withdrawals are taken from your after-tax contributions first, your converted amounts second, and your earnings third.
  • Five-Year Rule for Earnings: If you’ve had an open Roth account for at least five years and you’re over the age of 59 ½, you can withdraw earnings tax- and penalty-free.
  • If you’re aged 59 or under
    • With an account open for less than five years, your earnings are subject to ordinary tax and a 10% penalty tax. You can avoid the penalty if you use the funds for a first-time home purchase (there’s a $10,000 lifetime limit), college expenses, unreimbursed medical bills, or expenses related to birth/adoption or disability.
    • With an account open for more than five years, your earnings are still subject to ordinary tax and a 10% penalty tax. You can avoid the penalty with the same exceptions noted above. You can avoid both the ordinary tax and the penalty if you use the funds for a first-time home purchase (the $10,000 lifetime limit applies) or for expenses related to disability.
  • If you’re over 59 ½
    • With an account open for less than 5 years, your earnings will be subject to ordinary tax but not penalties.
  • Five-Year Conversion Rule: Each conversion has its own five-year time period. If you’re under 59 ½, the converted amount is subject to a 10% early-distribution penalty tax if you withdraw it within those five years.
  • Estate Planning Strategy: A Roth conversion (or series of conversions) can lower the value of your taxable estate by the amount of income tax paid during your lifetime. A Roth account is also advantageous to your beneficiary, since most non-spouse beneficiaries are now required to distribute the IRA within 10 years.

Dream boldly. Plan wisely.

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