The new year is an opportunity to make a fresh start. Have you fully optimized your personal finances for 2023? Watch the recap with Carrie Galloway, Global Head of Advice Lab, Amanda Lott, Head of Wealth Planning Strategy and Jordan Sprechman, Head of U.S. Wealth Advisory, to see what actions you can consider after a volatile year:
Last year was a rocky year for investors. Interest rates rose to levels we haven't seen in decades. The Fed increased rates seven times, the most aggressive hiking cycle in 40 years, and we saw stocks and bonds decline in value. However, because of those losses, prices have reset, in the process creating attractive opportunities for investors. In other words, it's a good time to put your capital to work. Amanda, how can clients be opportunistic in a higher rate environment?
The idea that I want to highlight with investing is respect to rightsizing your liquidity bucket. Now what do I mean by that? We want to make sure you have the right amount of cash. It's important to have some cash on hand but also important not to have too much. So a framework that we often use for clients for their liquidity bucket is a couple of years of living expenses, cash for any large outlays or purchases that are coming up in the year term, maybe a tax payment or a vacation home purchase that's on the horizon, and even a psychological safety net. Maybe there's a certain dollar amount that if it's in cash allows you to keep your long-term dollars invested, particularly during periods of higher volatility. And so rather than keeping all of your cash in literal cash, you can go out a little bit further on the yield curve and be well-compensated for that. And with the market valuation reset that we saw last year, across asset classes, now is one of the most attractive entry points that we've seen to get long-term money to work.
There are three ideas that I want to highlight of how you can keep more of your investment return. One is with tax-loss harvesting. Tax-loss harvesting isn't something that you should just do at the end of the year or even at the end of the quarter. It should be something that you're reviewing regularly. And in fact, technology and investment platforms have evolved considerably, but there are actually strategies that look daily for opportunities to harvest losses that can be used to offset gains that you've already realized or realized into the future.
The second idea that I want to point out with this idea of tax-efficient portfolio management is something called asset location. And what we mean here is in your portfolio, you likely have a collection of different types of accounts. Those accounts can have different tax attributes. Maybe you have taxable accounts, like individual or joint revocable trust, you have tax-deferred accounts, so think retirements, maybe investment-only variable annuities, and maybe even tax-free accounts, 529s, Roth accounts. And when we're thinking about the investments that are in your portfolio, those also have various attributes, both in their growth profile and also their tax profile. So when we marry those two things, mapping the right investments with the right accounts, you can generate significant tax alpha.
And finally, the last idea here is smart withdrawals. So if you're pulling from your portfolio, make sure you're pulling from the right account at the right time. The general rule of thumb is to pull from your taxable accounts before you pull from your retirement accounts, and then further, when you're looking at taxable accounts, pull from accounts that are still in your estate rather than ones that are already off your balance sheet.
So we've been talking about maximizing income tax efficiencies, but there are also techniques for maximizing transfer tax efficiencies, namely gift tax, estate tax, and generation-skipping transfer tax, or GST tax. Taxpayers can benefit this year from an increase in the annual exclusion and the lifetime exemption amount, which are at historically high levels.
Yeah, and Carrie, the first thing I would say about gifting-- you talked about the timing of gifting-- the first thing to remember is that I know the market's down 20-ish percent last year, more or less. The economics of gifting are at their best when the psychology is at its worst, and if you find that you have excess capacity to gift, the four specific techniques that we mentioned here, first is one that actually bears no relation to inflation, not directly, which is the gifting of the medical or education exclusion amount. The education and medical exclusion is one that is often overlooked but is a very, very powerful way to move wealth tax efficiently down the generations, albeit indirectly.
The next exclusion-- which, Carrie, you alluded to-- is the annual exclusion, which for years-- well, I guess for last year-- was $16,000. It's bumped up because of inflation up to $17,000, and that's $17,000 per donor per donee. And what that means is for a married couple with two children, one spouse could give $17,000, the other spouse the another $17,000, $34,00 to each of two children. That's $34,000 per child, so $68,000 for two children. And interestingly enough, with the exception of health savings accounts, a very small exception, the annual exclusion gifts are the most tax-efficient thing that taxpayers can do. Our studies indicate that taxpayers pick up about 340 basis points per year in what we refer to as "tax alpha" just by relying on the annual exclusion. The lifetime exclusion was, last year, $12.06 million. It's now $12.92 million. That's a jump of $860,000 per donor. That's $1.72 million for a couple. And taxpayers who have already used their $12.06 million exclusion should think in terms of now making a gift of another $860,000.
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Text, J.P. Morgan Private Bank, The views and strategies described herein may not be suitable for all clients and are subject to investment risks. Certain opinions, estimates, investment strategies and views expressed in this document constitute our judgment based on current market conditions and are subject to change without notice. This material should not be regarded as research or as a J.P. Morgan research report. The information contained herein should not be relied upon in isolation for the purpose of making an investment decision. More complete information is available, including product profiles, which discuss risks, benefits, liquidity and other matters of interest. For more information on any of the investment ideas and products illustrated herein, please contact your J.P. Morgan representative. Investors may get back less than they invested, and past performance is not a reliable indicator of future results. J.P. Morgan is not responsible for information provided by guest speakers (unaffiliated with J.P. Morgan) or the use by attendees of such information. J.P. Morgan cannot verify the accuracy of guest speaker content, views of statements, and accepts no responsibility for any direct or consequential losses arising from its use. Any discussion of companies/markets by guest speakers should not be interpreted as a recommendation to buy or sell or is an endorsement by J.P. Morgan.
Highlights from 2023 Planning Essentials, Actions to take amidst uncertainty. Market Volatility and Putting Cash to Work. A woman sits in front of a painting. Text, Carrie Galloway, Global Head of Advice Lab.
(SPEECH)
Last year was a rocky year for investors. Interest rates rose to levels we haven't seen in decades. The Fed increased rates seven times, the most aggressive hiking cycle in 40 years, and we saw stocks and bonds decline in value. However, because of those losses, prices have reset, in the process creating attractive opportunities for investors. In other words, it's a good time to put your capital to work. Amanda, how can clients be opportunistic in a higher rate environment?
(DESCRIPTION)
Another woman stands in front of an abstract painting.
(SPEECH)
The idea that I want to highlight with investing is respect to rightsizing your liquidity bucket. Now what do I mean by that?
(DESCRIPTION)
Text, Amanda Lott, Head of wealth planning strategy.
(SPEECH)
We want to make sure you have the right amount of cash. It's important to have some cash on hand but also important not to have too much. So a framework that we often use for clients for their liquidity bucket is a couple of years of living expenses, cash for any large outlays or purchases that are coming up in the year term, maybe a tax payment or a vacation home purchase that's on the horizon, and even a psychological safety net. Maybe there's a certain dollar amount that if it's in cash allows you to keep your long-term dollars invested, particularly during periods of higher volatility.
(DESCRIPTION)
Intermittently, Carrie, Amanda, and a man appear onscreen together in three panels.
(SPEECH)
And so rather than keeping all of your cash in literal cash, you can go out a little bit further on the yield curve and be well-compensated for that. And with the market valuation reset that we saw last year, across asset classes, now is one of the most attractive entry points that we've seen to get long-term money to work.
(DESCRIPTION)
Text, Tax-Smart Techniques.
(SPEECH)
There are three ideas that I want to highlight of how you can keep more of your investment return. One is with tax-loss harvesting. Tax-loss harvesting isn't something that you should just do at the end of the year or even at the end of the quarter. It should be something that you're reviewing regularly. And in fact, technology and investment platforms have evolved considerably, but there are actually strategies that look daily for opportunities to harvest losses that can be used to offset gains that you've already realized or realized into the future.
The second idea that I want to point out with this idea of tax-efficient portfolio management is something called asset location. And what we mean here is in your portfolio, you likely have a collection of different types of accounts. Those accounts can have different tax attributes. Maybe you have taxable accounts, like individual or joint revocable trust, you have tax-deferred accounts, so think retirements, maybe investment-only variable annuities, and maybe even tax-free accounts, 529s, Roth accounts. And when we're thinking about the investments that are in your portfolio, those also have various attributes, both in their growth profile and also their tax profile. So when we marry those two things, mapping the right investments with the right accounts, you can generate significant tax alpha.
And finally, the last idea here is smart withdrawals. So if you're pulling from your portfolio, make sure you're pulling from the right account at the right time. The general rule of thumb is to pull from your taxable accounts before you pull from your retirement accounts, and then further, when you're looking at taxable accounts, pull from accounts that are still in your estate rather than ones that are already off your balance sheet.
(DESCRIPTION)
Text, Gifting Strategies. Carrie Galloway's screen appears.
(SPEECH)
So we've been talking about maximizing income tax efficiencies, but there are also techniques for maximizing transfer tax efficiencies, namely gift tax, estate tax, and generation-skipping transfer tax, or GST tax. Taxpayers can benefit this year from an increase in the annual exclusion and the lifetime exemption amount, which are at historically high levels.
(DESCRIPTION)
The male speaker appears in front of a piece of artwork.
(SPEECH)
Yeah, and Carrie, the first thing I would say about gifting-- you talked about the timing of gifting--
(DESCRIPTION)
Text, Jordan Sprechman, Head of U.S. Wealth Advisory.
(SPEECH)
the first thing to remember is that I know the market's down 20-ish percent last year, more or less. The economics of gifting are at their best when the psychology is at its worst, and if you find that you have excess capacity to gift, the four specific techniques that we mentioned here, first is one that actually bears no relation to inflation, not directly, which is the gifting of the medical or education exclusion amount. The education and medical exclusion is one that is often overlooked but is a very, very powerful way to move wealth tax efficiently down the generations, albeit indirectly.
The next exclusion-- which, Carrie, you alluded to-- is the annual exclusion, which for years-- well, I guess for last year-- was $16,000. It's bumped up because of inflation up to $17,000, and that's $17,000 per donor per donee. And what that means is for a married couple with two children, one spouse could give $17,000, the other spouse the another $17,000, $34,00 to each of two children. That's $34,000 per child, so $68,000 for two children. And interestingly enough, with the exception of health savings accounts, a very small exception, the annual exclusion gifts are the most tax-efficient thing that taxpayers can do. Our studies indicate that taxpayers pick up about 340 basis points per year in what we refer to as "tax alpha" just by relying on the annual exclusion. The lifetime exclusion was, last year, $12.06 million. It's now $12.92 million. That's a jump of $860,000 per donor. That's $1.72 million for a couple. And taxpayers who have already used their $12.06 million exclusion should think in terms of now making a gift of another $860,000.
(DESCRIPTION)
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Here are 5 key considerations from the conversation to help map out your 2023 finances:
- Optimize your portfolio’s after-tax returns with a multifaceted approach to generate tax alpha. Look to harvest tax losses throughout the year, make sure your assets are held in the right types of accounts, and consider how you’re withdrawing from your portfolio.
- As you look to place assets tax efficiently, make sure to fund tax-deferred retirement accounts. Funding limits increased this year, providing a greater opportunity to save in these tax-advantaged vehicles.
- Estimate your quarterly tax payments. With today’s higher rates, it’s important to know how much cash you truly need on hand as excess funds could be invested to benefit from these higher rates.
- Review your life insurance policies to ensure they are still set to accomplish the current intent. Market volatility and changes in interest rates may have depleted the cash value of a permanent life insurance policy.
- One of the most tax-efficient ways to gift assets to family is through annual exclusion gifts. Both the annual and lifetime exclusion limits are increased this year making now a great time to gift if you have the capacity and desire to do so.
For a deeper dive on optimizing your personal finances for 2023, see our full article here or watch to the full webcast here.
