NEW YEAR’S MESSAGES

Though we have all been faced with living life very differently this past year, we at Horizon Financial Advisors are grateful that our families and friends remain healthy and that we were able to avoid any shutdowns or layoffs. Our hearts go out to those who weren’t as fortunate. We did work remotely from time to time, as requested by our Governor, but are now back in the office as of the first of the year. We have also resumed conducting in-office meetings with those clients who are comfortable doing so, but will continue to do so wearing masks. Despite the challenges faced last year, Horizon Financial Advisors brought on more new clients than any prior year, thanks to your referrals. We greatly appreciate the trust and confidence you place in us.

We also wanted to share that we decided to forgo our 30th anniversary celebration last year. When the pandemic struck and so many people lost their jobs and were in need, we felt that a celebration wasn’t appropriate. In lieu of the client raffle gifts we had planned, we chose to make donations to the Greater Pittsburgh Community Food Bank and the Philabundance food bank.

Lastly, we remind those who chose to suspend their RMDs last year (as allowed by the CARES Act passed last March) that they must resume taking distributions in 2021. However, no action is required for the accounts serviced by our office. Those distributions will automatically resume and will be processed based on the instructions on file with the IRA institution as of 2019. Also, those turning age 72 in 2021 will now be required to begin taking RMDs from their retirement accounts for the first time.

MARKET OUTLOOK

In the more than 35 years we have been financial advisors, we have never experienced a year like we had in 2020. It was a year filled with strife and uncertainty, including a global pandemic, a level of social unrest that we haven’t seen in decades, and political turmoil more fervent than any prior election year. Uncertainty is one of the greatest challenges to financial markets. When the pandemic struck in February of last year, the S&P 500 stock index quickly sank by 33.9%. The pandemic soon wreaked havoc on our economy with millions of people losing their jobs and thousands of businesses closing their doors or struggling to stay open. Nevertheless, the economic impact of the pandemic was not felt in equal measure by everyone or every sector. For example, a disproportionate number of job losses were incurred by the travel, food service, and entertainment industries. Conversely, other industries such as technology, health care, and home improvement benefited. Technology stocks gained roughly 43.9% last year, whereas energy stocks lost roughly 33.7%. Despite the pandemic, the increase in applications for new businesses in the U.S. hit a 13-year high, according to an analysis of U.S. Census Bureau data from the Wall Street Journal.

Within 128 days of the initial downturn in February, the S&P 500 rebounded to its previous level, resulting in the fastest rebound from a bear market in history. Stock market indices ended last year at all-time high levels. The Dow and S&P gained roughly 9.7% and 18.4%, respectively. Over all, U.S. stocks once again dominated their international counterparts with the exception of the emerging markets. Even Treasuries gained 8%. In the end, 2020 was a good year for both stocks and bonds.

We now begin a new year with a new Administration coming to Washington. What impact might this have on the markets? Ultimately, that will depend on actions taken in the future by the Federal Reserve, who establishes monetary policy, and by Congress who establishes fiscal policy. However, history shows that stocks usually do well regardless of which party controls the White House or Congress. Markets have a tendency to use checks and balances to make sure one party doesn’t have too much influence. If you look back at presidential election cycles, however, this year could prove to be a good one for stocks. Since 1930, the Dow Jones Industrial Average has gained an average of 10.0% in a president’s first year regardless of party affiliation.

In spite of current uncertainties, we see a number of driving forces that should positively impact both economic growth and the markets. First, the economic downturn was not caused by excesses in the financial systems, rather by a global pandemic whose existence should be temporary. Next, economic growth is expected to continue into 2021 on a global scale, though it will take more time for some industries than others to rebound. Also, the Federal Reserve has shown a willingness to do whatever it takes to help the economy, including keeping short-term interest rates low for some time. A strong housing market, spurred by low interest rates, is expected to continue. The ability of companies to innovate and adapt in the face of the pandemic will continue to provide global investment opportunities. Digital leaders across industries are disrupting the status quo as consumers rapidly form new habits thereby increasing demand in e-commerce, cloud computing, digital payments and processing, tele-medicine, remote home health monitoring, etc. We will eventually see slower growth in those areas, but the trend will continue. Pent up demand in the travel, food service, and entertainment sectors will help boost GDP when the virus becomes more contained. Lastly, many U.S. manufacturers plan to diversify their supply chains to decrease their over-reliance on China. This could also create economic opportunities in the U.S. and in other parts of the world.

The biggest challenge for investors, as always, will be to stay focused on long-term success and to avoid some of most commonly made mistakes. Avoid focusing on the short-term. Volatility in the short-term is much greater. Also, don’t assume that today’s negative headlines make it a bad time to invest. Last year was a perfect example of that. Avoid placing too much emphasis on past performance. It is much like driving a car by looking in the rear-view mirror and can be dangerous. Lastly, don’t forget the importance of proper diversification, including the many roles that fixed income and bonds can play in a portfolio. This reminds us of a famous quote by Benjamin Graham, who is widely regarded as the “father of value investing”. He has said “the essence of investment management is the management of risk, not the management of returns”. It is most important for us to focus on what we can control.

TRADITIONAL vs. ROTH - STRATEGIES TO CONSIDER

The terms “Traditional” and “Roth” refer to types of retirement savings plans and can be associated with either an employer-sponsored retirement plan, such as a 401(k), or to a personal retirement plan, such as an IRA. When comparing the Traditional versus the Roth for either a 401(k) or personal IRA, the question often arises as to which type is better. The answer depends on several variables, such as your current and expected future tax bracket, the amount of time before withdrawals begin, and other accounts held in your portfolio and their tax treatment.

In general, contributions to a Traditional 401(k) or Traditional IRA are made with pre-tax dollars. In other words, contributions are made with money that has not yet been taxed. Therefore, a tax savings is received when the contribution is made. The contributions and earnings then grow on a tax-deferred basis and are taxed later when withdrawn. Conversely, contributions to a Roth 401(k) or Roth IRA are made with after-tax dollars. There are no tax savings when the contribution is made. Therefore, contributions, as well as earnings, are tax-free when withdrawn.

So, which is better? As mentioned above, consider your current and expected future tax bracket. If you are in a higher tax bracket now than you will be later during retirement, making Traditional (or pre-tax) contributions makes sense. However, the longer you have before retirement, the more attractive the Roth option becomes because you have more time to accumulate tax-free earnings. Additionally, should tax laws would change that would increase future tax brackets, the Roth option could become more advantageous. One last point to consider is the updated rule on taking mandatory distributions from retirement assets (referred to as “RMDs”). Required minimum distributions (“RMDs”) must now begin at age 72 (previously age 70-1/2) from Traditional IRAs. They are also required for both Traditional and Roth 401(k)s if you are no longer participating in the plan (retired or have left the employer). However, RMDs are NOT mandatory from Roth IRAs at any age. This is another feature that makes the Roth option even more attractive.

Because of the significant advantages to the Roth, we strongly encourage investors to fund a personal Roth IRA where possible, even if they are already funding the 401(k). However, in order to make contributions to a personal Roth IRA, you must have earned income AND have an adjusted gross income of less than $125,000 if you are a single filer or less than $196,000 if you are a married filer. For those who are not eligible to make new contributions to a Roth, we offer two alternative strategies. The first is the “back door Roth”. The other is the IRA-to-Roth conversion.

The first alternative, termed the “back door Roth”, can be used by those who are not eligible to make a Roth contribution due to income limitations. With this strategy, a contribution is made to a non-deductible Traditional IRA then converted to a Roth since income limitations do not apply to conversions. Be aware that the conversion may or may not have tax consequences, so it is important to consult your tax advisor before executing this strategy.

The second alternative we often utilize to get money into a Roth is an IRA-to-Roth conversion. This strategy could be employed either by someone who is restricted from making a new Roth contribution due to income limitations OR by someone who is no longer working and is in a lower tax bracket. A conversion from a (pre-tax) Traditional IRA into a Roth IRA is considered a taxable distribution but is exempt from early withdrawal penalties if done before age 59-1/2. Because a conversion is taxable, it often makes sense to spread out a conversion over several tax years. Additionally, for those who are retired and in lower tax bracket, this strategy should be employed before RMDs begin.

As with any investment or tax strategy, the viability and effectiveness depends on the individual investor’s situation. If you have questions or would like to discuss any of these issues or strategies further, please call our office or consult your tax advisor.

TD AMERITRADE ACQUIRED BY CHARLES SCHWAB

In October of 2020, the acquisition of TD Ameritrade by Charles Schwab was completed. We are sharing this information because many of the investment accounts we manage for our clients are held at TD Ameritrade. Though the acquisition is complete, the process of bringing the two firms together is expected to take another 18 to 36 months.

It is important to point out that TD Ameritrade merely serves as the firm we have chosen to hold client accounts. They do not dictate how those accounts are invested, managed, or serviced. For many years we have had a successful relationship with TD Ameritrade, and what they provided enabled us to manage our clients’ accounts in an efficient, competitive, and cost-effective manner. As long as that continues with the merger of the two firms, we will continue our affiliation with them.

TAXATION UPDATE

The following are CURRENT tax rules and limits for the 2021 tax year. This information can be used to help you plan for the new year. However, this is all subject to change with a new incoming Administration and Congress in Washington.

• The tax rates for 2021 are the same as last year, but the income ranges have increased slightly. They are:

  Tax Rate	SINGLE FILERS Taxable Income Between	MARRIED FILING JOINTLY Taxable Income Between
  10%	0—$9,950	$0-$19,900
  12%	$9,951—$40,525	$19,901-$81,050
  22%	$40,526-$86,375	$81,051-$172,750
  24%	$86,376—$164,925	$172,751-$329,850
  32%	$164,926—$209,425	$329,851-$418,850
  35%	$209,426—$523,600	$418,851-$628,300
  37%	Over $523,600	Over $628,300

• The standard deduction for 2021 rises to $25,100 for married filers (plus $1,350 for each spouse age 65 or older), $12,550 for single filers (plus $1,700 if age 65), and $18,800 for heads of household (plus $1,700 if age 65).

• The limit for contributions into a 401(k) and 403(b) HOLDS at $19,500 (plus a $6,500 “catch-up” for those age 50 or older). The limit for contributions to a SIMPLE IRA also HOLDS at $13,500 (plus a $3,000 “catch-up” for those 50 or older).

• The limit for contributions into a Traditional or Roth IRA also remains the SAME. The limit is $6,000 for those under age 50 and $7,000 for those age 50 or older.

• Taking the deduction for Traditional IRA contributions may be limited for those who participate in an employer-sponsored retirement plan. The AGI income phase-out increases to $105,000-$125,000 for marrieds, $66,000-$76,000 for singles, and $0- $10,000 for married filing separately. Where only one spouse is active in a plan, the phaseout increases slightly to $198,000-$208,000 but remains $0- $10,000 for married filing separately.

• The income limit for making Roth IRA contributions also increases slightly with the phase-out at $198,000-$208,000 for married filers, $125,000-$140,000 for single filers, but $0- $10,000 for married filing separately.

• The 0% tax rate on capital gains and qualified dividends still exists. It applies to married filers with income less $80,800 and to single filers with income less than $40,400.

• The Social Security wage base for this payroll tax INCREASES to $142,800 for 2021.

• Those collecting Social Security before full retirement age (who are between the ages of 62 and 66 and 2 months) can earn $18,960 in 2021 without losing benefits. But individuals who reach their Full Retirement Age during 2021 can earn up to $50,520 in the months before reaching FRA without losing benefits.

• As a reminder, alimony payments to an ex-spouse for divorces beginning in 2019 and later are no longer deductible when paid but are also no longer taxable income to the recipient. (Divorces prior to 2019 are grandfathered under the old rules, whereby alimony payments are deductible and income received is taxable.)

• For individuals who pass away in 2021, the Federal estate and gift tax exemption increases to $11,700,000.

• The annual gift tax exclusion once again remains at $15,000 per recipient.

• Required minimum distributions from IRAs can still be made as contributions to charitable organizations without being considered taxable income. The distribution must go directly to the charity.

• The American Opportunity Education tax credit holds at $2,500 PER STUDENT for qualifying expenses made within the first four years of post-secondary education. The credit phases out for married filers with income between $160,000—$180,000 and single filers with income between $80,000-$90,000. For those not eligible for the American Opportunity Credit, the Lifetime Learning Education tax credit offers a maximum credit of $2,000 PER RETURN. It phases out for married filers with income between $119,000-$139,000 and single filers with income between $59,000-$69,000.

• The contribution limit to Health Savings Accounts (“HSAs”) increases slightly to $3,600 for single coverage and $7,200 for family coverage. HSA owners age 55 or older can contribute an additional $1,000. As always, you can make the contribution only if you have a “high deductible health plan”, which now means having insurance coverage with an annual deductible of at least $1,400 on single coverage and $2,800 on family coverage. In addition, the out -of-pocket maximum threshold is now $7,000 on single coverage and $14,000 on family coverage. Please be aware that distributions cannot be made to pay for insurance premiums unless for they are paid under COBRA, while receiving unemployment, or if age 65 or older.

• The income level in 2021 to qualify for health premium tax credits when purchasing “Obamacare” health insurance through the exchange is a maximum of $51,040 for singles. The income threshold increases based on the number of people per household.

All Sources: Capital Group, Wall Street Journal, Internal Revenue Service, National Association of Tax Professionals, Cypress Capital, Forbes, CFRA Research, Kiplinger.

Disclaimer: The opinions expressed herein do not necessarily reflect those of Trustmont Financial Group/Trustmont Advisory Group. Additionally, the information contained herein has been obtained from sources believed to be reliable but the accuracy of the information cannot be guaranteed. Lastly, reference to any product, service or concept in no way implies that it is suitable for everyone. There may also be risks and costs associated with any product, service or concept mentioned herein. Where applicable, a prospectus should be read for complete details. The material presented here is neither an offer to sell nor a solicitation of an offer to buy any securities.