As we transition from the first to the second half of the year amidst a positive market but an uncertain economic picture, it’s crucial to adapt your financial approach accordingly. In this article, I outline six different investment and planning topics with high-level considerations to help optimize your financial plan before year-end.

Taking Advantage of Higher Interest Rates for Income Generation

The rise in interest rates over the past year has created new opportunities to earn greater income through various investments. Traditional fixed-income securities, such as treasuries or corporate bonds, are regaining attractiveness as yields improve. For example, bonds that paid approximately 2% annually less than two years ago may now pay closer to 5-6%^[1]. Additionally, alternative investments like private credit and income-oriented structured notes offer potentially higher income streams beyond conventional markets.

Investors seeking income from their portfolio are in a much stronger position today than they were just one year ago or even at the beginning of this year. These investors can now earn substantially more income without adding risk to their portfolio. This is different from prior years, as most portfolio returns over the last few years have come from investment growth as opposed to investment income. We’re now in a position where we can generate both.

Revisit Your Strategic Allocation

While the stock market may not have fully recovered, there has been substantial growth in some areas, dating back to late 2022.  As a result, your current investment allocation may have drifted from your long-term targets. That said, this is an opportune time to review your asset allocation strategy, not only between stocks, bonds, and alternatives, but also within each asset class.

For example, many of our clients have a strategic emphasis on large-cap domestic stocks within their equity allocation. Since this area of the stock market has generally outperformed other areas (such as international and small-cap equities), the allocation to large-cap may now be larger than initially intended. This scenario may indicate a good reason to add to international or small-cap stocks to help ensure your investments don’t become skewed towards one area of the market.

As mentioned previously, as of the date of this publication, you can now earn yields of over 5% by owning treasuries^[2], so it may make sense to reallocate funds away from traditional bond mutual funds into treasuries.

Similar to investments in fixed income, investors who are interested in alternative investments now have a chance for more attractive returns than they could last year. For example, certain types of structured notes offer returns exceeding traditional equity markets, while including some degrees of principal protection. Additionally, due to the floating rate nature of private credit investments, private credit funds have had a continued tailwind, and now certain strategies offer yields in excess of 10%.  This is all due to the rate hikes that have continued into 2023.

Revisit Your Estate Plan: Prepare for Changes Ahead

It’s crucial to revisit your estate plan in light of potential changes ahead. The current estate exemption is scheduled to sunset at the end of 2025, meaning the exemption will significantly decrease from $12.92 million back to the 2017 exemption amount of $5.49 million adjusted for inflation (which is approximately $7 million in today’s dollars). ^[3]. To ensure your assets are protected and distributed according to your wishes, it’s essential to review and potentially update your estate plan with a qualified estate planning professional. Although the end of 2025 may seem like a long way off, don’t wait until the last minute. We advise taking proactive steps to safeguard your wealth and legacy.

Maximize Active Retirement Plans: Roth 401(k) and Tax Planning

Since we’re just over halfway done with the year, there’s still time to contribute the maximum to your active 401(k) plan. The maximum employee contribution for 2023 is $22,500 (up from $20,500 in 2022). For those 50 years and older at the end of 2023, the maximum contribution is $30,000. Since the contribution limits are higher this year than they were last year, be sure to check your scheduled contributions so that you maximize the benefit of your company plan.

Additionally, consider making Roth 401(k) contributions instead of traditional 401(k) deferrals. Roth contributions are made with after-tax dollars, allowing for potential tax-free withdrawals in retirement. Given that tax rates are historically low, it is likely that tax rates may rise. By contributing to a Roth 401(k), you effectively lock in today’s historically low tax rates and create a “forced savings” mechanism for your retirement.

Check-in on Your 529 Plan(s)

In addition to checking on the status of the contributions to your retirement accounts, it’s also important to check in on your 529 plan (education savings account) to make sure that you are on track to contributing a dollar amount in line with your 2023 goals.

By reassessing your 529 plan regularly, you can ensure that it aligns with your goals and your child’s educational aspirations. Plus, there are some state-specific tax benefits that coincide with 529 plan contributions. For example, Illinois residents who file a joint tax return can deduct up to $20,000 of contributions made to the Illinois 529 plan. Importantly, contributions to an Illinois 529 plan does not require the beneficiary to attend an Illinois school- the funds can be used at any eligible school.

Optimize Your Giving Strategies

The market’s strong start to 2023 presents an opportunity for individuals to re-evaluate the tax efficiency of the way they donate to charity. Those who want to make a philanthropic donation and are under the age of 70.5 can take advantage of the recent market by donating appreciated stocks directly to charities or to their donor advised fund. Doing so will allow you to avoid paying capital gains on the investment, and the charitable organization/donor-advised fund can sell the securities received without tax implications. If you still want to own shares of the investment you donate, you can simply purchase the amount donated back. This will effectively raise your cost basis without diluting your allocation to the investment.

For individuals aged 70.5 and above with a traditional IRA subject to required minimum distributions (RMDs), considering a qualified charitable distribution (QCD) can be advantageous. A QCD allows you to donate directly to charities while satisfying your RMD requirements and simultaneously reducing your taxable income. The difference for these individuals is that they can sell the appreciated securities in their IRA without incurring tax and they can simply donate the cash proceeds directly to the charity of their choice.

Conclusion

We don’t know what the second half of the year is going to bring, but taking proactive steps to optimize your wealth is crucial in today’s ever-changing financial landscape. The team at Strategic Wealth Partners is here to support you in navigating these complexities.

We encourage you to reach out for personalized guidance, whether you have questions or want to discuss your specific financial goals. Together we can adjust your plan to help maximize your wealth and assist in securing your financial future. Remember, smart decisions today can lead to long-term financial success tomorrow.

^[1]Active Fixed Income perspectives Q2 2023: Everything everywhere (Link)

^[2]6 Month Treasury Rate (Link)

^[3] Prepare for future estate tax law changes (Link)

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