Author Archives: Edi

The Federal Trade Commission (FTC) & Your Credit Report

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The FTC has made access to credit reports from the three major credit reporting agencies via www.annualcreditreport.com available on a weekly basis for free. This was announced at the end of October without much fanfare. Prior to COVID these reports were only available annually (for free) and during COVID the FTC made it temporarily available on a weekly basis. This is good news for consumers!

Start the New Year off with a review of your three credit reports. You will likely need your old credit report to sign-in – the identity confirmation questions are more difficult than in the past and may require that you reference your prior credit report. Once you download your new credit reports focus on ensuring that they correctly state your information and make corrections promptly if needed. We will go over credit history in a later check-in this year.

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com

2024 – Financial Opportunities and Challenges

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In 2024 we are expecting recoveries in some real estate categories, a settling of interest rates, and dramatic growth in the AI (Artificial Intelligence) space. It is the latter that could help businesses improve efficiencies and deal with headwinds from labor costs/shortages though it is still at its infancy. In addition, we are seeing growth in capital invested to deal with the expected scarcity in rare earth metals. If we have limited supplies then price volatility will greatly impact data, electronics, alternative energy, and agriculture investment sectors (new sources for these metals are from mining of asteroids and other stellar bodies).

The less predictable potential for volatility, in the USA, will come from our ability to deal with the destabilizing forces all around us from climate change and the election. I suspect that the US consumer will continue to spend through volatility and reward companies that meet the consumer demands (as they did in 2023).

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com

“Thought Starters” for 2024

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I hope these “thought starters” will help close 2023 and make the most of 2024:

  1. Acknowledge What Went Wrong and Move Towards your future: What’s done is done and we can’t go back and change it, so recognize the errors and the changes that need to be made. This is our challenge and our opportunity for 2024.
  2. Be kind to yourself: Celebrate your Progress! Acknowledge how far you’ve come and “keep your eyes on the prize” despite any 2023 setbacks (job loss, death, overspending, disability, divorce, market declines, missed goals, procrastination etc.).
  3. Measure What Matters: As Theodore Roosevelt said, “Comparison is the thief of joy.” Understand what matters to you and measure your progress towards achieving your goals.
  4. Focus on What You Control: We can’t control other people, politics, the stock market, or social media but we can control what we think and what we do each day. Ever check an email or text only to look up 20 minutes later and find yourself scrolling on your phone, not knowing how you got there?!
    It is up to us to put in place ways to control our behavior and to hold ourselves accountable to our goals and values. This is particularly important when headlines fill you with fear. Don’t waste your valuable time on what you can’t influence or control.
  5. Protect Your Wealth: Implement ways to protect your assets, life, health, income, personal information, family, and confidential data so that when a crisis occurs you can meet expenses and make the most of new challenges. We protect our wealth using insurance, updated legal documents, sufficient emergency savings, updated organized finances, and updated resources (lines of credit and portfolio). We work together to keep moving you towards your financial goals through life’s challenges.
  6. Tax Allocation: Planning your taxes is essential to helping you to keep more of what you’ve earned. To make the most of opportunities we must work together to understand your base tax profile and adjust it through the year so that we can execute on available tax strategies by year-end. During high-earning years we often prioritize tax savings while keeping our eyes on the big picture that may indicate recognizing higher taxes to gain a future advantage.

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com

Guidance on inherited IRA RMD – IRS Notice 2023-54

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The original SECURE Act, signed into law in December 2019, changed many of the long-standing rules governing IRAs and other retirement accounts, and no single measure in the legislation had a more seismic impact on retirement planning. Specifically, the law stipulated that “Non-Eligible Designated Beneficiaries” (i.e., neither surviving spouses or disabled/minor beneficiary) would be required to empty the inherited retirement account by the end of the 10th year after the decedent’s death (and would no longer be able to ‘stretch’ the distributions over their own life expectancy).

While we expected that Non-Eligible Designated Beneficiaries would not be required to take annual distributions in addition to emptying their accounts in the 10-year period, the IRS in February 2022 issued Proposed Regulations that would make a subset of these beneficiaries subject to BOTH the 10-Year Rule and annual Required Minimum Distributions (RMDs). The caveat, however, was that these were merely proposed regulations.

In October 2022 we were informed that there wouldn’t be a penalty if beneficiaries didn’t take a 2022 RMD but by October most had already! Unfortunately, they failed to address the requirements for 2023 and onward.

Finally, this month the IRS released Notice 2023-54, which provides relief once again by eliminating any penalties for failing to take (potential) RMDs for 2023 for these specific beneficiaries. Once again, they punted the RMD decision another year (2024). Keep in mind that these beneficiaries MUST still empty the IRA account by the 10th year.

Although we monitor notices on RMD rules changes and discuss RMD requirements with each of you as needed each year, your engagement in this topic ensures that we understand the relevant regulations for your financial plan.

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com

Looks like consumers are doing well but banks are entering a ‘credit crunch’

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Shrinking the money supply has helped the Feds reduce high inflation.  Monetary and fiscal indicators continued to tighten significantly in the second quarter, pointing towards a slowdown in the U.S. economy. Negative money growth, increasing fiscal deficit, rising real interest rates, and central banking guidance of higher short-term interest rates are creating a classic ‘credit crunch.’ This credit crunch comes as the economy progresses further down the current financial cycle, slowing growth and limiting upward pressures on inflation.

While money supply and real interest rates reflect a traditional tightening financial cycle, as is the case now, a contraction in real bank credit is not usual when GDP is rising. Usually, money supply leads bank credit but the latest 12-, 24- and 36-month rates of change in real bank credit are all negative instead of the historical average of 3.4%/yr.

As the second quarter ended, the contraction in bank credit showed the potential for a credit crunch if not enough cash is available. During this time those holding sufficient cash for their needs will not be impacted if the bank credit crunch is widespread.

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com

Last Friday’s message from Fed Chairman

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Speaking from Jackson Hole, Fed Chairman Powell said, “Inflation is too high,” adding that they are prepared to raise interest rates further. The inflation rate in June/July has been around 3%.

The Feds effort to dampen inflation is working as the latest data shows a continued shrinkage of money supply.  The conundrum is that nominal GDP is up 6.3% from a year ago so somehow, the broader economy is growing despite less money circulating.

A side effect of all that additional money supply was a rise in stock prices. Excess money tends to end up with consumer spending or investing. However, the money supply is shrinking so this trend may reverse for a time unless we see good financials from companies this fall.

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com

California continues to move forward with payroll Long-Term Care insurance

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Long-Term Care insurance (LTCi) funded through a payroll tax is currently under serious consideration by California. We do not yet have details, but this may be similar to what Washington State instituted several years ago.

To prepare you for this possibility we will be adding a LTC insurance conversation to our fall meetings for anyone employed in California (we will look to see if other states are also considering a similar measure).

The passage of AB 567 (2019) established the Long-Term Care Insurance Task Force (Task Force) of the California Department of Insurance. This task force is developing a statewide insurance LTC services program. The Task Force has already recommended several options to the Governor and the Legislature (2022). The options in the Feasibility Report will undergo financial analysis and their findings will be included in an Actuarial Report, which, if approved by the Task Force, will be submitted to the Legislature no later than January 1, 2024. (if you want more details let us know and we’ll send you information from California Insurance Commissioner Ricardo Lara).

What does this program mean for any employee (or business owner)? A mandated LTC insurance program would be an ongoing cost to cover an insurance pool that may or may not provide a significant level of support or portability. If this follows a similar program implemented in Washington State, we recommend that most of our California employed clients consider obtaining a minimal LTC insurance policy prior to year-end (for now we don’t yet know what options California will provide to opt out so no action is needed).

How soon could the Program be implemented? The Task Force will make its final recommendations to the Legislature in the Actuarial Report, which will be submitted by January 1, 2024. At that point, legislation would be required to establish and implement a statewide program which can be dated in the future or more likely as of the day it is accepted.

How is the Program opt-out designed? We only have minimal information, but for now individuals who own eligible private insurance as of a certain date on or before the program effective date would be permitted to opt out of the program. Any new policies sold after this deadline would be ineligible for program opt out but could qualify for reduced program contributions. To be eligible to opt out, or receive reduced program contributions, the policy would have to meet certain standards (not yet outlined but expected this fall) and would be subject to periodic recertification.

How would the program be funded? A progressive payroll tax, perhaps split between employees and employers, with an income-based tax for self-employed individuals is the most commonly recommended design so far.

We will keep monitoring the progress of the Long-Term Care Task force and also work with clients to determine if a private LTC insurance policy is appropriate. This is only relevant to anyone who will continue to earn income in California.

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com

AI and Data Analytics – new SEC rules in 2024

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At end of July, the SEC approved a plan that they say will root out conflicts of interest that can arise when financial firms use Artificial Intelligence (AI) to serve clients. They are also improving rules requiring companies to disclose serious cybersecurity incidents within four business days of any significant breach.

I would be more impressed if these were required for all technology firms that handle customer data analytics (not only financial firms).

The SEC asserts that the new regulations will ensure that ‘predictive data analytics is used to optimize services that better serve clients’ and not for the benefit of the financial firm. Banks and brokerage firms are typically using AI for fraud detection and market surveillance, but recently the shift has been made to have AI and analytics as part of trading recommendation, asset management, and lending. This is a huge development with serious implications for consumers. The goal of the new regulation is to ensure that biases are not ingrained in the technology algorithm, particularly since many vendors and consumers accept technology output, as fact, without human verification.

In this vein, The Federal Trade Commission (FTC) has opened an investigation into Microsoft Corp – OpenAI Inc (the creator of ChatGPT) to examine what risks the chatbot poses for consumers . . . these programs are written by humans and can extend biases and discrimination.

The ideal ‘responsible innovation’ in technology is appealing but so is responsible capitalism or governance and we are currently not doing well in any of these areas.

AI has the potential to draw on reams of data to target individual investors and nudge them to alter their behavior on trading, investing, borrowing, or even opening financial accounts for them. Many of the new tools can be transformative in our time, and I would love to use them. Even so, we should be leery about the concentration of this technology and powerful data in the hands of only a few firms which can pose a huge risk for future stability in financial markets.

It is important that we not provide our private data to technology or analytics software that is not yet fully tested and regulated from unregulated companies. We need to continue to demand that regulations be developed to ensure the safety of our data and particularly add controls for how for-profit firms can use our data. I am particularly concerned when I see errors in financial software output that are accepted as correct because they are software generated.

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com

Charitable Deductions

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There are many ways to give to charitable causes without risk of IRS wrath. We agree that there is a lot of value in making contributions to charities partly with dollars that would be paid in income taxes, but each person has to recognize that you must simultaneously give away non-tax money. For example, a gift of $1M can in some cases reduce your taxes by about $400K (or 40% of the donated dollars) BUT you must accept that the other $600k will be funded from your savings (non-tax dollars).

The tools used to make charitable contributions can be simple direct donations to a charity or to many using Donor Advised Funds (DAF), or a specific group using a charitable trust or use of Family Private Foundations. The type of contributions can be cash, stock, shares in a company, or any asset. What is important is that the charitable deduction follow IRS proven process to the letter. This will prevent negative consequences of having to pay taxes and tax penalties years later.

This month, we have a case (Braen, et. al v. Commissioner of Internal Revenue, TC) that disallowed a $5.22 million charitable income tax deduction claimed by the Braen family in connection with a sale of a property in NY made through S Corp shares. The rejection appears to be based on not adhering to standard timing/practices and on property valuation misstatements. Unless they appeal, the family will have no deduction and must pay substantial penalties to the IRS.

What does this mean for you? There is nothing risky about using known and established ways to reduce your tax liability and particularly advantageous if you can also use it to fulfill your philanthropic plan, but this must be implemented using proven processes. Let us know if you are ready to create your philanthropic financial plan.

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com

What we heard at the July Fed meeting

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The latest Federal Reserve meeting (July 26th) increased the interest rate another 25 basis points to 5.375%. We have another three upcoming meetings (September 20th, November 1st, and December 13th) left in 2023.

The current focus is now on fall corporate financial reports and the impact of existing debt payments on corporate profits to see if additional interest rate hikes are needed. GDP numbers out by July 27th showed an economy that is growing and consumers who are still spending (particularly in services rather than material goods) indicating that we are not in a recession. The CORE inflation measure (which strips out food and energy) used by the Federal Reserve in their evaluation actually dropped from 4.6 to 4.1% from May to June.

The new increase resulted in mortgage rates that though high (around 7%), compared to recent extremely low mortgage rates, are not historically the highest. It may be surprising to see that in areas with low housing supply (most people don’t want to sell a house with a mortgage below 3%) we are expecting house prices to actually increase 5%-10%. In areas with excess supply the story is different, and prices are dropping in the short-term. Similarly, the increased mortgage rates and abundant supply appear to be negatively impacting the commercial property market.

What does all this mean? Though your home and real estate may be impacted by this rate increase, we are not seeing a similar impact on your portfolio. If you feel strongly that commercial real estate will recover significantly this would be a time to invest in commercial REITs. Though we see promise in undervalued commercial real estate, we have more confidence that residential (not commercial) will outperform in the long-term despite additional potential interest rate increases.

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com