How We Invest in This Volatile Market

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As you have probably read in the news that the financial markets worldwide are pretty volatile recently. The S&P 500 index has lost more than 18% of its value year to date. To investors who want to seek safe shelters in the bond market, the sad news is that you most likely have lost over 9% year-to-date if you invest in a typical inter-medium term U.S. bond fund. Then, you may wonder what caused the volatility and how to invest in such a volatile market?

There are some unique factors combined to contribute to the market losses for investors:

  • Federal Reserve aggressively raising interest rates plus the reverse of its “QE” because of rising inflation in the U.S.
  • Supply chain disruptions due to COVID-19 lock downs
  • Rising commodity prices due to the uncertainties of the Russia – Ukraine War
  • Potential slowdown of the growth of world economy

How to invest in such an economic environment? Let me tell you how we help our clients invest in this kind of market.

We use an investment process that we call goal-driven, life-stage based investing.  First of all, investing is highly personal. That is why we design individual investment policy for each of our clients. First, we help clients define and prioritize their goals. Then we help them divide their goals into two big categories: short-term or long-term. And then, we further categorize these goals into “needs”, “wants” and “wishes”.  After we really know our clients’ goals and situations, we build each client’s strategic investment portfolios for long-term success. We select investment products to match their goals and life-stage they are in currently, taking into consideration their risk capacity and risk tolerance. Every year, our firm conducts macroeconomic conditions analysis as part of our evidence-based, data-backed investment research to design tactical investment strategies for the current market conditions.

During times like what we have recently been experiencing, we communicate with our clients, review with them their financial plans and explain to them the market impact on their plans. Knowing that they have sound financial plans in place, our clients are more confident that they will be able to make decisions rooted in reasons, not emotions.

Teen Traders, Good or Bad?

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Recently, Fidelity announced that it is launching a Fidelity Youth Account for 13 to 17 years old.  The no-fee account allows teenagers to buy and sell stocks, exchange traded funds and Fidelity mutual funds. Fidelity pitches this new business as an education opportunity for teens to learn how to manage their money. So, should we cheer for the news that the brokerage house now allows teens to trade stocks? Not so fast.

First, since the start of pandemic last year, many of the new retail investors who entered the stock market are younger investors. Of the 4.1 million new accounts that Fidelity added in the first quarter of 2021, 1.6 million were opened by retail investors 35 and younger, an increase of more than 222% from a year prior, according to CNBC. Now, by allowing teens to trade stocks, is this another tactic for brokerage houses to attract money of even younger demographics?

Second, the name no-fee account is misleading. This could give teens the impression that trading is free. It could also encourage some investors to trade more. Numerous studies in the past have shown that frequent trading by timing the markets are detrimental to average investors’ long-term investment success.

Third, I am all for educating teens on sensible personal finance, but I think this time, it does the opposite of fostering good financial habit. According to a recent industry report that most of the Generation Z investors, people who were born between 1997 and 2015, get their investment advice from social media such as TikTok. Want to know what this means for investment world? Look no further than GameStop stock bubble earlier this year. This kind of investing habits are not unique to Gen Z investors. Think about how many of us who make investment decisions based on the “advice” or “tips” gotten from friends, coworkers, and/or online social media groups.

All in all, what I see from Fidelity’s latest venture is not a boon for teens and their families. If we really want to educate our teens on personal finance, teaching them the good habits of saving and budgeting, and understanding the impacts of personal debt are much more important than knowing how to trade stocks at this age.

What Role Does Your Financial Advisor Play in Estate Planning – Revisit

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In 2019 I wrote an article with the title “What role does your financial advisor play in estate planning process?” Now I would like to revisit this topic given that Coronavirus pandemic has brought estate planning front and center to the minds of many people old and young.

In the past, when the words “estate planning” came up, most people would conjure up an image of an old, super wealthy man, pondering plans about who will get his enormous amount of fortune after he is gone. There are a couple of inaccuracies with this image. First of all, estate planning is not only about dealing with one’s monetary assets. Second, estate planning is critical and beneficial not just for older people.

So, what is estate planning? It involves using wills, trusts, insurance policies, and other legal documents to give instructions on what happens to your personal property, your tax, care of your young children and/or pets, and if any, your health care arrangements and final arrangements upon your death, etc.

Then, what role does a financial advisor play in her client’s estate planning process?

  • A financial advisor can help clients create plans that truly reflect their values, goals, and wishes with consideration of their overall financial situations.

Experienced financial advisors know that having estate planning documents do not always mean that a person’s estate planning goals are accomplished. Does the plan achieve what one wants to leave behind? A financial advisor knows a client and his/her family well and will take consideration of client’s overall situation in clarifying and prioritizing client’s goals and objectives before wills and trusts are drafted.

  • A financial advisor helps ensure continued success of client’s estate plan.

Estate planning is a dynamic process. Estate planning does not end after a client sign the estate planning documents. A financial advisor helps clients identify proper assets to fund their estate plan, designate and update beneficiary, review their situations annually and work closely with attorneys to update any changes in client’s family situations in the estate planning documents.

  • A financial advisor can reduce client’s mistakes and save them costs by increasing the chance that client’s estate plan will be carried out successfully.

An estate plan is not successful if client’s estate plan is not carried out as intended. Working with attorneys, a financial advisor can help ensure client’s assets are transferred properly by avoiding mistakes and minimizing administrative costs at death. Also, in some cases an advisor can help client’s intended beneficiaries locate and account for the assets they previously might not know of.

It is probably true that nobody wants to talk about his or her own death. But, let’s be honest, by avoiding and delaying this important planning, one simply does disservice to their loved ones. The pandemic taught us some valuable lessons. So, stop delay and start planning.   

“Pandemic Puppy” Deserves a Long-term Home

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Since the pandemic began early last year, there were increasing numbers of Americans who adopted so called “pandemic puppies”. These fur babies brought joys and companionship to many families who were confined to their homes due to governments’ lock down orders. Sadly, in a recent article USA Today reported that those dogs are being returned to shelters all cross the country.

I do not know all the reasons behind the surging numbers of returns of these dogs. But, I venture to say that if you have adopted puppies during the pandemic, with a little planning on your part things can work out pretty nicely between your puppies and you. The things you need to consider now that life has been gradually returning to pre-pandemic ways are how your new routines affect your dog and what the long-term costs of having a dog are. I will offer some tips on the financial part while leave it to you to figure out how to make your new routines work out for you and your dog.

 Depending on the breed of the dog, some dog could incur a large amount of medical bills down the road. One way to mitigate the financial burden is to buy pet insurance. Do a cost/benefit analysis. Does it make sense to buy pet health insurance in your individual situation? Many pet insurances only cover cats and dogs, but a couple of insurers will also cover birds and reptiles. Before you purchase health insurance for your dog, be sure you understand what covered and excluded conditions are and how you file an insurance claim. Some plans do not cover routine office visits. Many pet insurance companies put their sample insurance policies on their websites. Locate these policies and read them carefully.

Our pets bring us joys and companionship, but they also depend on us for continuous care. How to provide such care in case we are not able to? The pandemic taught us how important it is for us to have some kind of estate plan in place. Fortunately, pet trust can be a valuable tool for pet owners to do so. So far, all 50 states of the U.S have passed laws allowing pet owners to set up trusts for their companion pets. While considering setting up a trust for your dog, it is a good practice to designate different parties as caregiver of your dog and trustee that administers the funds in the trust for your four-legged companion respectively.

Alternatively, pet owners can opt for a pet protection agreement, which is simpler than setting up pet trusts, to protect their pet. With a pet protection agreement, pet owners can name their pets’ guardians, leaving funds, and providing instructions for how to care for your pets when you are not around.

Hopefully, with a bit of creativity and some planning by you, the “pandemic puppy” will be your companion for many, many years to come. 

How to Help Your College Students Have Positive College Experiences

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I call the period that runs from every September to next May college application season for high school seniors across the country. The 2020/21 college application season is almost over. Now it is time for most high school seniors to weigh the offers and envision the lives they will be living for the next four years.

This is a time of excitement as well as anxieties for both students and their families. As parents of soon-to-be college freshmen, they all want their children to have four successful college years. But, I know that “success” is a highly subjective word. And student’s college experiences may be different due to the kind of colleges or universities they attend.

So, first let us define what success in college means. Success in college, according to many college students themselves, means achieving good grades, graduating on time, maintaining a balanced social life and landing a good job after graduation. On the surface, these goals seem to be simple and easy to achieve, right? In reality, however, there is no small number of students either struggle academically or have a hard time fitting in socially.

After perusing books and articles related to this subject and talking to some parents whose kids have already gone through colleges, I found out some universal traits of college students who have had positive experiences during college.

The first trait of such a student is having definite goals for life. I cannot stress enough of the importance for a college student to have definite goals for his or her life. But, there is a caveat. The goals should be what the students truly want for themselves, not the goals their parents or society set for them. Lucky are those who have concrete goals even before they set foot on college campuses. These students are motivated, self-driven and confident. They will seek and even create the kind of college experiences that help them achieve these goals.  

The second trait of a successful college student is having a good amount of self-control. The majority of high school seniors will leave their childhood homes and live in some kind of campus housing arrangements for the first time. No longer in their lives will there be nagging about eating healthy food and finishing their homework on time. At the same time, they are constantly facing the tasks of making choices: going to parties or working on that course assignment which is due very soon, eating healthy meals or eating whatever they want, and etc. Life is about trade offs. College life is no exception. The students who have successful college lives are those who are able to make good decisions most of the time. Generally speaking, making good decisions need good amounts of self-control.    

The third trait of a successful college student is the possession of good study skills. Academics are a big part of college life. It is hard to believe that a college student is having a positive experience when he or she struggles academically. For students who lack confidence in this skill set, I would like to share with them the formula for academic success outlined in Purdue University’s Guide to Creating a Successful College Experience:

  • Read the syllabus
  • Go to every class
  • Sit near the front in class
  • Find a study partner or group in every class
  • Take good notes.
  • At the beginning of each semester, ask yourself:
    • Do I understand what is expected of me in each class?
    • Do I have contact information for someone in every class to study with or contact in case I’m sick?
  • Manage your time wisely
  • Never let a week go by where you don’t understand the content in your courses
  • If you are confused or lost in a class, visit your professor, go to a help lab or study with a friend. Use your campus resources — they are there to help you
  • Study 2 hours for every hour you are in class

The fourth trait of a successful college student is getting involved in a wide range of activities. We know that college success is more than just good grades. Activities outside classrooms not only enrich students’ lives, they also help students explore their interests, develop social skills and possibly gain life-long friendships. Some of the activities include volunteering, working part-time on campus, getting involved in student’s residence hall, doing internships or studying abroad.

In addition to the above four traits, another factor affecting students’ college experiences is the emotional support or lack of it from their families. College years are coincident with a person’s transition period to adulthood. And this transition period is filled with stresses and struggles. In Janet Hibbs and Anthony Rostain’s apt named book – “The Stressed Years of Their Lives”, they talked about the mental problems facing today’s college students. Alarmingly, almost one-third of all college students report having felt so depressed that they had trouble functioning in the last twelve months according to the authors. Although so called “helicopter parents” are mocked and discouraged, this does not mean that parents can stay out of their college-age children’s lives other than writing tuition checks.

Before parents send off their children to college, they need to be aware of two important laws that could be critical to their children’s well beings. They are HIPAA and FERPA. HIPAA stands for Health Insurance Portability and Accountability Act. HIPAA protects a person’s confidential health information. FERPA stands for the Federal Educational Rights and Privacy Act of 1974. FERPA was designed to protect the privacy of educational records and to give students the right to inspect and review their educational records (collegiateparent.com).

In most states 18 is the legal age of majority, which means most college students’ health information and academic records are protected under law and not shared with their parents without the students’ consent. By checking the students’ academic records parents could detect early signs of their children’s mental issues. In order to access their students’ transcripts parents need a consent form to disclosure of FERPA protected academic records. In the age of Covid-19, it is also important for parents to have signed HIPAA waiver and health care proxy from their college-age children in order to make medical decisions on their children’s behalf. If parents need more information on these forms they can contact their financial advisors and/or family attorneys for help.

Looking back, 2020/21 college application process is quite a journey for both high school seniors and their families amid a global pandemic. As the high school seniors are about to open a new chapter of their lives, I wish them all successes in college.

Bitcoin, an Investment Asset Class?

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Almost every great product or commercial idea has a great story behind it. Take the famous perfume, Chanel No.5, for example. The story goes like this: During the late summer of 1920 Coco Chanel commissioned perfumer Ernest Beaux to make a perfume for modern women. It is said that Beaux’s assistant accidentally added a dose of aldehyde in a quantity never used before to the concoction for the perfume sample they named No.5. And among all the 10 samples Ernest Beaux came up with for Chanel, She picked No. 5. The perfume is a huge success.

So, what does the story of a legendary perfume have to do with Bitcoin? It’s because Bitcoin, too, has a fascinating story behind its origin. But, let’s first look at what this thing called Bitcoin is.

A Basic Primer on Bitcoin

What is Bitcoin? In short, Bitcoin is a digital currency. Unlike government issued currencies, there is no one central administrator such as the Fed to regulate it. It is decentralized. It can be sent from user to user on the peer-to-peer online network without the need for traditional financial intermediaries such as banks. A distributed, public ledger called block is used to record and store every Bitcoin transaction. Similar to ledgers used by accountants for bookkeeping, each electronic ledger-block contains a set of transaction history of Bitcoins in a certain time period. Each block has certain storage capacities. Once filled, these blocks are “linked” or “chained” to each other because each new block also stores the hash of the previous block’s header, thus chaining the blocks together. Hence, this linked chain of blocks gives the name “blockchain”. Anybody can look up Bitcoin transactions and download a copy of the blockchain into their computers. But, the real identities of the parties to each Bitcoin transaction are not necessarily linked to that transaction. In this sense, Bitcoin is considered anonymous.

What does it mean by “owning Bitcoins?” Owning Bitcoins is very different from traditional ways of having money bills in your wallets or putting money in your bank accounts. In the world of Bitcoin, you do not physically hold the currency or have an account with Bitcoin balance. Nor can you store Bitcoins in your computer like a file such as MP3. According to Coinbase, an online platform for buying, selling, transferring, and storing digital currency, “owning bitcoins” actually means owning an online Bitcoin address, which has a balance recorded on the blockchain. Owning this bitcoin address gives you the control of the associated Private Key, a secret number that allows Bitcoin to be unlocked and sent, and therefore allows the signing of transactions. Put it simply, to make a Bitcoin transaction, the sender just asks for the receiver’s Bitcoin address, and then generates some locking scripts using the receiver’s Bitcoin address so that only the receiver can create unlocking scripts using his or her private key associated with that address.

Then, where did Bitcoins come from? Or, who issues Bitcoins, you may wonder. The closest example to how Bitcoins come from is probably gold mining. The gold miners dug the gold out of the ground for circulation. Nobody issues gold. Similarly, there is no such central authority like Federal Reserve to issue Bitcoins. Bitcoins are created by Bitcoin protocols, a rule of systems determining how many of and who can create them. Bitcoins are mined and brought to circulation by Bitcoin miners. Unlike the gold miners in the 19th century California gold rush, who used tools like pickaxe and pan, the Bitcoin miners use powerful and specialized computers to solve complex computational math problems on the Bitcoin network. By doing this, Bitcoin miners verify the authentication of each Bitcoin transaction. Once a miner has verified 1 MB (megabyte) worth of transactions, also known as a “block,” he or she is rewarded with a number of newly-created Bitcoins. Therefore, you can say that Bitcoins are created out of thin air. It is said that there is a total of twenty one millions of Bitcoins. So far, eighteen millions of them have been “mined.”

A Brief History of Bitcoin

It started with its enigmatic inventor, a Japanese called Satoshi Nakamoto who published a white paper called “Bitcoin: A Peer-to-Peer Electronic Cash System.” right after the 2008 financial crisis. In these papers Satoshi Nakamoto envisioned a kind of digital currency that can be sent from user to user on the peer-to-peer online network without the need for traditional financial intermediaries. On Jan. 3, 2009, the first block, called the genesis block, was mined; the first test transaction took place about one week later, and the first economic transaction involving Bitcoins took place when a Florida man negotiated to have two Papa John’s pizzas delivered for 10,000 Bitcoins on May 22, 2010, according to an article by Coryanne Hicks published on US News and World Report’s website.

The first exchange platform on which Bitcoins were traded is a now defunct website called bitcoinmarket.com, which went live on March 17, 2010 (source: bitcoin.com). Nowadays Bitcoins are traded in multiple exchanges such as Coinbase and Binance among others.

From its humble beginning of trading one Bitcoin for 5 cents to the high of $19497.40 in 2017, then tumbling down to a trough of $3232.76 and back to present day of roughly $55979.20 as I am writing this article, the price history of Bitcoin is a volatile one.

Bitcoin as an Investment Asset

From an obscure alternative financial concept to the mainstream investment world, Bitcoin has been generating buzzes as well as controversies among investment professionals along the way. There are two camps of opinions on whether Bitcoin is an investment asset or not. The first camp firmly believes that Bitcoin is a new asset class. This camp constitutes mostly of Bitcoin miners, traders and investors. In an article written for Forbes, journalist Laura Shin summarized four reasons why she thinks Bitcoin is a new asset class: investability of Bitcoin, its economic value, its correlation of returns from other investment assets, and its risk-return profile. The other camp who does not think Bitcoin is an asset class, or at least not yet, including Goldman Sachs. Goldman Sachs’ rationale includes Bitcoin’s high volatility, its inability of generating cash flow like bonds, and its inability of generating earnings through exposure to global economic growth. Recently, current Treasury Secretary Janet Yellen has joined the Bitcoin skeptics and warned that Bitcoin is “an extremely inefficient way” in conducting monetary transactions. 

No matter what your take on these two opposing views, first of all we have to understand how Bitcoin is valued. Is it worth whatever price you happen to see on the financial market on that day? Like many other goods the value of Bitcoin follows an economic principle called the “law of supply and demand”. Essentially, your Bitcoin could be worth $50,000 or 5 cents depending on the price people is willing to pay to have it. I caution anyone who is eager to jump onto the Bitcoin bandwagon. You need to thoroughly understand what investing in Bitcoin means, how this might fit in your investment portfolio and how it can benefit your individual situations. Otherwise, it could cost you dearly.

ISO vs. NSO – Employee Stock Options Basics

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ISO and NSO, what do these terms mean? These terms stand for incentive stock options (ISOs) and non-qualified stock options (NSOs or NQSOs) respectively. They are mostly common among companies which use their company stocks as part of the employee’s compensation and/or retirement benefit packages.

NSO or NQSO are options to buy shares of company stock at a stated price and can be exercised over a specific period, i.e. over 10 years. The exercise price is normally 100% of fair market value on the date the option is granted, but it can be set lower.

ISO is an option to buy shares of company stock at a set price on the date of grant and can be exercised over a period of up to 10 years. Like NSO, the exercise price of ISO is normally set at the fair market value on the date the option is granted.

After reading the above definitions of ISO and NSO you are probably wondering: what are the differences of these two options? The differences mostly lie in the employer tax deductions and income tax treatment of exercising ISO and NSO options to the employees.

With most NSOs, if the employee opts to exercise the options to hold the shares of company stock, then the employee must recognize as ordinary income the amount of difference between the option grant (exercise) price and the fair market value of the underlying stock at the time of exercise. This income is subject to social security (FICA) and federal unemployment (FUTA) taxes. Subsequently, the employee will recognize either capital gains or losses on any appreciation or depreciation in the stock value from the day of exercise until the day the employee sells the stock. Alternatively, the employee can opt to exercise to sell, and then the employee will pay income and social security taxes on the amount realized on the sale of the stock minus the option price.

Unlike NSO, where the employee has to pay ordinary income taxes when he or she exercises the options to hold the stock, an employee who receives ISOs does not have to pay regular income tax at the time of exercise. If, after the exercise the shares are held for at least one year from the date of exercise and two years from the date of grant of the options (1year/2year holding period requirements), the sale of the shares will result in long-term capital gain from the date of the option grant to the date of sale of the stock. If, the 1year/2year holding periods are not met, then the sale becomes a disqualifying disposition and the ISO is treated like a NSO, where the difference between the option price and the fair market value at the time of exercise will be taxed as ordinary income.  

The difference between the taxation of a disqualifying disposition of an ISO and that of an NSO is that the recognized ordinary income from the disqualifying ISO is not subject to social security and federal unemployment taxes.

Here are two examples explaining how ISO and NSO work:

  • Adam received 100 shares of NSOs from his employer ABC Industry, Inc. on February 8, 2017. The option exercise price is $5 per share. On the date of grant, there is no taxation to Adam. On March 15, 2018, when the fair market value of the ABC’s stock is $10 per share, Adam exercised his options. Adam would recognize $500 ($10-$5=$5 times 100 shares) as ordinary income. On March 20, 2019 when the ABC’s stock price rises to $20, Adam sells all of his 100 shares of ABC stock. Adam would recognize $1,000 as long-term capital gain and would pay capital gain taxes because he has held the stocks for more than 12 months after he exercise his NSOs. If, instead of exercising the NSOs on March 15, 2018, Adam waited until March 20, 2019 to exercise the option and simultaneously sell the underlying stock, then, Adam would recognize all proceeds from the sale, $20 stock price/share – $5 option price times 100 shares = $1,500, as ordinary income and would pay regular income tax and social security taxes on this $1,500.

  • Eve received 100 ISOs from XYZ Industry Inc. on January 28, 2017. The option exercise price is $5 per share. If Eve exercised her ISOs on January 31, 2018 when the fair market value of the stock was $10 per share, she would recognize no income for regular tax purposes. If subsequently, Eve sells the stocks when its price rises to $20 on February 9, 2019, she would be able to recognize the entire gain of $ 1,500 as long-term capital gain because she has met the 1year(from exercise)/2 year(from grant) holding period requirements. If,  Eve sells the stocks on December 31, 2018, then she has not met the 1year/2year holding period requirements. In this case, the $500 from the exercise of the options on January 31, 2018 would be treated as ordinary income and the subsequent gain of $1,000 from sale of the stocks on December 31, 2018 would be recognized as short-term capital gains.

With NSO, the employer can take a deduction in the amount of income that is taxed to the employee. With ISO, however, if the employee complies with the 1year/2year holding period requirements, the employer gets no tax deduction from it.

If an employee is given stock options, he or she needs to be clear what kind of options they are. There is an employment requirement for employees who receive ISOs. That is, the employee who receives ISOs must remain employed with the same employer from the time of the grant of the options until at least 3 months before the exercise.

Another difference between these two employee stock options is that ISOs are not transferable except at death, while NSOs are transferable during the employee’s lifetime.

The Recent GameStop Stock Phenomenon

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Even if you are not a stock investor or you don’t follow market performance like a religion, you have probably heard of the latest news on GameStop, the video game retailer.

GameStop’s stock spiked from roughly $65 a share just before this past Monday to an intraday high over $480 on Thursday before closing around $236. This stratospheric rise of the video game retailer alone is enough for an awe-inspiring financial news story. But who were buying that caused the stock to rise to such high? There is more to this story.

The rise is fueled by traders in the WallStreetBets Reddit group and caused a short squeeze for the hedge fund short sellers who have bet against GameStop and shorted its stocks. What is a short squeeze? A short squeeze occurs when a stock or other asset jumps sharply higher, forcing traders who had bet that its price would fall, to buy it in order to stop even greater losses, according to Investopedia. Their scramble to buy only adds to the upward pressure on the stock’s price. The Reddit group also pushed up prices of AMC and BlackBerry significantly. Trading restrictions on GameStop’s stock posed by brokerages and trading platforms angered traders and some lawmakers but also helped lowering the stocks’ prices.

The sudden surge of GameStop’s stock price created unintended consequences for funds containing GameStop. For example, two exchange traded funds, XRT and GAMR found that GameStop now accounts for 20% of their total assets. It also tests the SEC’s market manipulation rule and could have profound impact on the market in the future.

Your 2021 Essential Financial To-do List

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2020 is finally behind us. What is your plan for year 2021? Here I outlined some financial tips for you to put on your early 2021 to-do list to jump start the year to be a successful and prosperous one for you and your loved ones. Below are some of the essential personal financial information you will want to save and keep in handy as your reference guide throughout the year.

  • Adjust your retirement plan contributions for 2021

2021 retirement plan contribution limits

Plan Maximum
Deferral
Age 50
and Over
Catch-up
Contribution
401(k)/403(b) $19,500 $6,500  

Deductible IRA
$6,000 $1,000
Non-Deductible IRA $6,000 $1,000  
Roth IRA $6,000 $1,000

The individual IRA contribution deadline for 2020 is April 15, 2021.

Phase out range for deductible IRA is $105,000-$125,000 for joint filing if covered by a workplace retirement plan; Phase out range for Roth IRA is modified AGI from $198,000-208,000 for joint filers.

Health Savings Account Contribution Limit for 2021:

  Self-only Family Coverage
Contribution Limit $3600 $7200
Contribution Limit over age 55 $4600 $8200
High-deductible health plan
minimum deductible  
$1400 $2800
High-deductible health plan
out-of-pocket maximum  
$7000 $14,000
  • Keep in mind these important income tax facts for 2021:

2021 Income Tax Brackets and Rates:

Tax
Bracket
Single Filer
Income Range
Married File Jointly
Income Range
10% $9,950 or less $19,900 or less
12% $9,951- $40,525 $19,901 – $81,050
22% $40,526 and $86,375 $81,051 and $172,750
24% $86,376 and $164,925 $172,751 and $329,850
32% $164,926 and $209,425 $329,851 and $418,850
35% $209,426 and $523,600 $418,851 and $628,300
37% $523,601 or more $628,301 or more

The standard deduction is $12,550 for individuals and $25,100 for married couples filing jointly.

2021 Alternative Minimum Tax (AMT) Exemption Amounts:

  Single or
Head of
Household
Married File Jointly
or
Qualified Widow
Married File
Separately
Maximum
Exemption
$ 73,600 $ 114,600 $ 57,300
25% reduction
if over:
523,600 1,047,200 523,600          
Exemption
Eliminated
818,000 1,505,600 752,800

2021 Qualified Dividend and Long-term Capital Gain Tax Rate:

Income Range:
Single filer
Income Range:
Married file jointly
Capital Gain Tax Rate
$0-$40,400 $0-$80,800 0%
$40,401-$445,850 $80,801-$501,600 15%
Over $445,850 Over $501,600 20%

Net Investment Income Tax:

Individuals will owe the tax if they have Net Investment Income and also have modified adjusted gross income over the following thresholds:

Filing Status Threshold Amount
Married filing jointly $250,000
Married filing separately $125,000
Head of household (with qualifying person) $200,000
Qualifying widow(er) with dependent child $250,000
Single $200,000

The Net Investment Income Tax (NIIT) applies at a rate of 3.8% to certain net investment income of individuals, estates and trusts that have income above the statutory threshold amounts.

  • Annual Exclusion for Estates and Gifts

In 2021, the first $15,000 of gifts to any person is excluded from tax.

Since 2018, the Tax Cuts and Jobs Act temporarily increased the basic exclusion amount for estate and gift taxes for tax years 2018 through 2025, with both dollar amounts adjusted for inflation. For 2021 the exclusion amount is $11,700,000 per individual, and $23,400,000 for a couple.

  • Review your Insurance policies

If your situation has changed during 2020, such as change of job, birth of a new child, or purchases of new car, house, etc., you need to review your insurance coverage or talk to your financial adviser to help you come up with proper coverage amount for your current insurance needs.

Don’t forget the deadline for individual tax filing is Thursday April 15, 2021.

Gather and organize all your paperwork such as W-2 forms, bank statements, mortgage payment statements, property tax receipt, business expenses, investment statements from your broker-dealers, charity donation receipts, etc. for your 2020 tax filing.

  • A couple of events that you might want to keep an eye on:
    • House Ways and Means Committee Chairman Richard Neal plans to reintroduce in the new Congress the Securing a Strong Retirement Act of 2020, which would boost the required minimum distribution age from 72 to 75. In 2019, the Secure Act passed by congress has pushed the age that retirement plan participants need to take the required minimum distributions (RMD) from 701/2 to 72. If this new bill passes, it would create more favorable financial planning opportunities to people contributing to various retirement plans.
    • Another thing to watch for is for families with kids applying for college in the fall 2021. The dates and places of taking the SAT/ACT had been changed a couple of times last year by the institutions which offer these tests due to the pandemic. Since the pandemic is still going on parents need to make sure their high school kids know the exact dates and places of taking these tests. Parents and students can go to www.collegeboard.org to check out the latest updates on SAT test or www.act.org for ACT tests.

Plan for Year 2021

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As I am reflecting back on year 2020 there is no doubt that coronavirus pandemic is the biggest theme of this year. The pandemic has not only disrupted global economy, it also changed our lives more or less. Last December when I wrote an article on looking into year 2020, “uncertainty” and “change” were the two words that came to my mind at that time. This time, I think “resilience” and “recovery” will be the two theme words of year 2021.

Resilience is the US economy which bounced back from its second quarter low on a tear. Resilience also is human spirit that carries us over despite lock-downs and remote working/learning. Now that we have clinically proven effective vaccines we see light at the end of this dark tunnel. We are entering the stage of recovery.

But we are still vulnerable coming out of this pandemic. Recent weeks’ numbers of US initial jobless claims were still stubbornly high, pointing to a slow-down and weak recovery well into the year 2021. Many economists pointed out that it is highly likely that we will not have a full economic recovery until after the end of year 2022.

It is hard to predict the short term trend of the stock market. Due to the pandemic caused economic downturn, the Fed and the government will continue to support the US economy with fiscal and monetary policies at least in the short term. These temporary stimulus policies in turn will most likely sustain the stock market’s high valuations in much of the year 2021.

We probably will not see drastic changes in tax law in 2021 if the Republicans win the Senate majority. However, several rounds of economic stimulus packages passed during the Pandemic widen the government deficits. Therefore, mid-term to long-term there could be quite significant changes to current tax law, especially rolling back of 2017 tax cuts for the rich and corporations.

When it comes to personal finance, there are a few strategies for you to plan for year 2021. That is, budget and track your spending; manage your debt and increase your emergency reserve.  

If you have not had money set aside for rainy days, start building your rainy day reserve fund as soon as possible. Build the fund to cover at least three months of family expenses. If you already have three months of expenses of emergency fund set aside, preferably in savings account or money market fund, increase the reserve to cover six months of expenses. If personal financial situation allows it, it is better to increase the emergency reserve to cover 12 months of expenses at this time.

The reason I am recommending the increase in emergency reserve is because entering 2021 there are still many uncertainties, including possible continued pandemic, relatively high stock market volatility and weaker than expected economic recovery that may all affect your job and financial stability. It is wise to have a larger than usual monetary cushion to carry you over during these unprecedented times. And if the economy recovers much faster than we predicted, then you will need less emergency reserve and have some extra money to take advantage of the opportunities emerged in the financial market and elsewhere in the coming year. 

Thanks for reading and have a very happy holiday season!