Social Security Up, I-Bonds Down, Tax Loss Harvesting
Crappy Year, Tax Loss Harvesting
No other words to explain 2022 other than it's been a really crappy year for investors. This has been one of the most difficult environments that most investors have ever experienced, with stocks and bonds firmly negative on the year, rising inflation, a war that continues in Ukraine and Central Banks aggressively raising interest rates.
Year-to-Date Performance of Market Benchmarks (as of 09-30-2022)
- S&P 500 (^SPX) = -24.77%
- Nasdaq (^IXIC) = -32.40%
- Small Company Stocks (^RUT) = -25.86%
- International Stocks (^MSEAFE) = -28.88%
- U.S. Core Bonds (^BBUSATR) = -15.55%
We have covered in past communications that there is a silver lining, higher interest rates for savers of which we haven't seen in years. Money Markets close to a 3% APY, FDIC insured CDs over 4% APY, etc. so while markets recover, you can still earn, albeit less than inflation, on your cash and savings. Read: Get Paid Interest Rates of 2% to 13%
When you experience a market decline, it's a common strategy to harvest tax losses to offset any capital gains and income, with any excess losses carry forward to offset future gains/income and ultimately help lower your taxes.
For Sandbox clients with after-tax investment accounts, we have and will continue to employ this strategy, with a thorough review as we head into year-end. We are mindful of the "wash-sale" rule and we also look to remain neutral on your investment exposure, by selling one position and purchasing an equivalent so that you can participate in a market recovery while using this year's losses to your tax benefit. Read: The Cure for High Inflation May Soon Present a Buying Opportunity
Social Security Benefits +8.7% in 2023
Social Security and Supplemental Security Income (SSI) benefits for approx. 70 million Americans will increase by + 8.7% in 2023.
The 8.7% cost-of-living adjustment (COLA) will begin with benefits payable to more than 65 million Social Security beneficiaries in January 2023. Increased payments to more than 7 million SSI beneficiaries will begin on December 30, 2022.
A Social Security COLA of 8.7% is rare — enjoy it now as this may be the first and possibly the last time that beneficiaries today receive a COLA this high. There have only been three other times since 1975, the start of automatic adjustments, that the COLA was higher — 9.9% in 1979, 14.3% in 1980 and 11.2% in 1981.
Learn More About Social Security COLA (click here)
Series I Bonds - Interest Rate Drop on November 1st
The interest rate on popular Series I savings bonds — intended to protect consumers against inflation — are likely heading down even as inflation continues to surge. The new interest rate for I bonds purchased after the end of October 2022 is estimated to be 6.47%, down from a record 9.62%. The rate is linked to the change in inflation over the six-month period from March to September which, while elevated, slowed from the previous half-year stretch.
Americans have purchased billions of dollars worth of I bonds this year. At a time of extreme market volatility, they’ve outperformed major stock indexes and bond markets. The government began selling I bonds in 1998 to help households protect their savings from rising prices. That’s made the low-risk investment particularly appealing this year as inflation surged to its highest level in four decades.
The bonds’ interest rate is made up of two components: a fixed rate that has stayed at 0% since 2020 and a variable rate set twice a year that rises and falls with the consumer price index. The Treasury Department sets I bonds’ variable rate on the first day of May and November each year, and the upcoming reset will be based on the CPI data for September that was released last Thursday.
Series I bonds purchased in October will assume the current rate of 9.62% -- for six months, until the end of March. For April 2023, they will assume the new, lower rate of 6.47% -- that will take effect starting November 1st. If you still intend to purchase a Series I Bond, you should consider purchasing prior to October 31, because you still have the opportunity to buy for the next two weeks and lock in six months at 9.62%.
Series I bonds are low risk, but their limitations make them less than perfect for some investors, especially as their rates start to come down. US citizens, residents and government employees can purchase up to $10,000 in I bonds per calendar year. (Those who use their federal income tax refunds may purchase an additional $5,000, which would bring the annual limit to $15,000.) The bonds must be held for a minimum of one year, and cashing them in before five years requires forfeiting interest from the previous three months.
Learn More about Series I Savings Bonds (click here)
Required Minimum Distributions (RMD) for 2022
If you have reached an Age of 72 or older, you have likely received the Required Minimum Distribution (RMD) notice from your retirement account custodians (ie. Fidelity or Schwab). We have copies of this information in our system and if we have not already, we'll begin reaching out over the upcoming month. RMD's are required cash distributions from your pre-tax accounts (IRA, 401k, 403b, TSP, etc.) annually by December 31. You can withdrawal more, but not less and we will withhold for both Federal and State taxes per your guidance.
Qualified Charitable Distributions (QCD) are a great way to reduce the taxes of a RMD and support any charitable inclinations. We can assist with this process and make it very easy. Learn more about QCDs (click here).
In light of the current market environment, there are a variety of strategies to consider on when to take your RMD. Be mindful that it does not have to be one lump sum withdrawal, the distribution can be done over the course of weeks or months, with the only requirement to take the minimum required amount each year (based on IRS factor table).