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Wrought Insights - December 10, 2021 Thumbnail

Wrought Insights - December 10, 2021

Taxes Financial Planning Investing

What caught my attention over the past weeks in the world of finance covering everything from financial planning and investments to global events

In this edition: Monthly Market Insights, Tax Changes Likely Coming This Month, and A Guaranteed 7% Return!?

Monthly Market Insights: December 2021

For December’s Market Insights, Blackrock is out with a report that has some particularly helpful insights. Highlights below, click to read more.

Consecutive years with negative bond returns are rare

Historically since 1926, it has been rare to see two consecutive calendar years of negative bond returns. In fact, we have not seen two consecutive negative years since the 1950s.

Stock market and higher interest rates

Historically, periods of rising long-term interest rates have been beneficial to stocks, but periods of rising short-term interest rates have been a different story.

Inflation varies by region

Higher inflation has been top of mind for investors recently. But depending on where you live, inflation could be much higher or much lower than the national average.

Tax Changes Likely Coming This Month

The tax planning whiplash continues! The Build Back Better act was approved by the House of Representatives and sent to the Senate where it is being negotiated. My industry contacts place a high probability that this act will be passed this month. There have been many changes since this was first announce and I wanted to point out a few that are the most relevant to you all.

Some of what is NOT in the bill any longer

  • Increasing the top marginal rate from 37% to 39.6%
  • Increasing the top capital gains tax rate from 20% to 25%
  • Reduced Estate tax exemption
  • Also omitted are changes to grantor trusts and family limited partnerships that you may have heard of

Some of what IS in the proposed bill

  • Getting rid of the backdoor Roth IRA starting in 2022 and limiting Roth Conversions for those with income in the highest tax brackets to a 10 year window of opportunity
  • Raising the cap on State and Local Tax Deductions (SALT) which are currently capped at $10,000. Any increase in the cap would be helpful for those of us residing in Blue States.

A Guaranteed 7% Return!?

Before a month ago, I had never even heard of Series I US Savings Bonds (I Bonds). Due to the quirks in how the interest rate on these is determined, they are currently paying out an annualized return of 7.12% guaranteed by the US Government. This has garnered a lot of attention as most savings accounts are paying pitiful amounts of interest these days.

So what’s the catch? First, you cannot sell or redeem I Bonds within one year of ownership. If you cash them in before five years have passed, the penalty is the previous three months’ worth of interest. The interest rate is set semi-annually so your worst case is that if you redeem in one year you walk away with a guaranteed 3.56% return on your purchase. Not bad considering other options.

The second catch is that each person is limited to purchasing up to $10,000 per year through Treasurydirect.gov. So Client and Co-Client can each purchase $10,000. You can buy in December 2021 for your 2021 purchase and again in January of 2022 for your 2022 purchase. So in theory, Client and Co-Client can purchase $40,000 of I Bonds in the next couple of months.

Catch number three is you have to open an account on Treasurydirect.gov. I Bonds cannot be purchased through a brokerage account like Altruist or inside of a retirement account like an IRA or a 401(k) plan.

I Bonds are not an appropriate replacement for your emergency cash reserves but if you have cash above and beyond your emergency fund click to read more on Tresurydirect.gov or give me a call.

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