Echo Blog

Echo Blog

Hedged Equity Strategy - Targeting A Smoother Ride for Equity Investors

By Echo Huang, CPA, CFP®, CFA

As the US stock markets have done well for the past 8 years, many investors wonder if their portfolios are positioned well for potential market corrections.  Though it is impossible to predict the future, expecting volatility in the coming years is a safe bet.  Market volatility is normal, and feeling uneasy about a lower portfolio value is normal too.  Historical analysis shows that pullbacks of 5% have occurred about once a quarter, and pullbacks of 10% are likely to occur once per year.  Large pullbacks greater than 20% tend to occur just once per market cycle.  It is especially important to be mindful about how to dampen portfolio volatility in the later stages of the business cycle.

With the memories of large losses in stock markets in year 2008 when S&P 500 Index lost 38%, many investors feel like allocating more to bonds and cash now to reduce volatility of portfolios.  However, while bonds are part of a diversified portfolio, bonds are not paying much interest and the value of bonds tend to go down as interest rates are likely to increase in the future.  Money market funds are earning less than 1% and are not likely to provide returns exceeding inflation.  At Echo Wealth Management, we have considered various alternative strategies to reduce equity risk and have implemented three equity alternative strategies in our client portfolios.

Have You Considered This Mega Roth Strategy?

By Echo Huang, CPA, CFP®, CFA

Last month, one of my new clients and I called the administrator of her old 401(k) plan to rollover the balance to her IRA account at TD Ameritrade.  To her surprise, she had $36,000 in after-tax contributions (not the same as a Roth) with earnings of $70,000 from the after-tax contributions she made many years ago in addition to $700,000 pre-tax contributions and earnings.  She was able to request two checks - one for the $36,000 to a new Roth IRA account (a Roth conversion that is tax-free because there is no taxation on otherwise after-tax funds!) and one for the $770,000 to a traditional IRA account (which does not incur an income tax assessment by virtue of being a rollover).  The end result – now she has $770,000 of all pre-tax funds in an IRA, $36,000 in a Roth IRA, and her tax cost this year is zero!

One great benefit is that the balance in her Roth IRA account will now grow tax free!  It was a pleasant surprise for both her and for me, but I thought to myself “If she had rolled-over the $36,000 to her Roth IRA earlier in 2014 or 2015, the earnings from this after-tax contribution in the past two to three years (i.e. $7,000) would have been tax-free instead of being in an IRA that will be taxable upon distribution.”  And this made me want to tell you, that if you have made any after-tax contributions to your 401(k) from before the Roth 401(k) became available, you should consider reviewing the plan provisions on in-service withdrawals if you still work for this company.  If you have already left or retired from this company, it’s still easy, you can do what my client did.  But leaving an after-tax balance in the plan does not help you grow tax-free because the earnings from the after-tax contributions are taxable if you take distributions from the plan to spend in the future.

Financial Planning Like It's 1999!

By Tyler Lodahl, Associate Wealth Manager

When we are children and young adults, it can be easy for us to go about our lives without thinking about the true value of learning particular skills now, when we are young, rather than waiting until we’re older. When I look back at my life through those halcyon days of middle and high school, and even college, it makes me truly realize the significance and value of learning particular financial life skills when we’re young. These skills, I now realize, not only impact a young adult’s knowledge and understanding of finances at that age, but also evolve over time as they gain life experience and exposure to new and more complex financial concepts. As a Junior and Senior at the University of Wisconsin-Madison, I served as a peer educator for two Financial Life Skills courses, one for freshman/sophomore students, and the other for upper classmen, with most of the students being seniors preparing for life after graduation. The courses covered topics ranging from our personal view of money based on our core values, beliefs, upbringing, etc., to preparing financially for unexpected life events by establishing a “rainy day fund”, to utilizing insurance to best fit our needs. My interactions with these college students and other students over the years related to personal finance have highlighted for me a few key financial life skills/concepts. Three concepts that consistently arose and that I wish I was exposed to in greater detail at a young age are:

  1. Budgeting/cash flow management;
  2. The power of paying yourself first as a saving strategy;
  3. The value of compound interest.

Are Investment Advisory Fees Tax Deductible?

It’s tax season again, and a question we get from a number of clients after receiving their year end statements is, “Are my investment advisory fees tax deductible?” And the answer is an equivocal, “It depends.”

Congress did grant a tax deduction for certain investment expenses, but with anything to do with the tax code, the devil’s is in the details. Not to worry though, we’ll use this opportunity to settle the issue no matter your situation.

Happy 2nd Birthday Echo Wealth Management!

By Echo Huang, CPA, CFP®, CFA

With thankfulness and appreciation for my friends, family, team and clients, I am excited to celebrate the 2nd birthday of Echo Wealth Management today! It has been a satisfying journey over the past two years of building a strong foundation for the business that focuses on taking the complexity out of wealth management. We have been blessed with amazing client experiences and the supportive efforts from our centers of influence, including attorneys, CPAs, insurance agents, business operations and technology partners. 

Engaged! Now Comes the Planning Part

By Steve Drost, Associate Wealth Manager

The day of my engagement (just last month) was the best day of my life.  After a day of anxiety awaiting the proper moment, the time finally arrived. I got down on one knee and she said “Yes.”  The 48 hours following my proposal and her acceptance were a whirlwind of awesomeness – countless phone calls, texts, Facebook messages, Snapchats, Instagram posts, Twitter mentions, and even a couple handwritten “Congratulations” cards in the mail (by far the most memorable, by the way).  By the time a week had passed, I was finally getting used to seeing the ring on her left hand, and we decided it was time to really start planning our wedding.

All gender bias aside, there are two types of people in this world: those who have been looking forward to planning their wedding since they were a child and those who have not. My fiancée is the former, and myself, the latter.  I am very analytical – things either fit or do not fit in the puzzle.  So naturally the first thing I did was open up Microsoft Excel and start making the first draft of the budget and guest list.  She, more artistic and visually creative, picked up the latest edition of Bridal Guide Magazine.  I was researching how much photographers cost and she is asking me if I like coral and ash grey for wedding colors.  Not that it’s a bad thing, but there was a difference on where we each wanted to start.  I cared more about the lists and data gathering, she more how the day will look and feel. This difference in personalities isn’t a compatibility disconnect or even negative, it’s a good thing! We are just naturally drawn to different bits and details (I’d probably pick blue, grill food, and everyone would be wearing shorts, so thankfully for everyone involved I’m not planning a wedding alone).

The time is NOW to think about Estate Planning

By Tyler Lodahl

“All we have to decide is what to do with the time that is given to us.” This quote, taken from the Lord of the Rings novels by J.R.R. Tolkien comes when the main character, Frodo Baggins, is faced with a daunting task of leading his close companions on a perilous task to save the world as they knew it. While this quote can have many deep meanings, it reminds me of the importance of planning for the unexpected. Frodo, unsure of what was on the horizon, was reminded by his companion Gandalf that while we are unsure of the future, we have the power right now to decide what to do with the time that we do have. Growing up, I pictured estate planning as the rather dreary process of establishing a will that ultimately provided instructions as to the final disposition of one’s estate, or everything one owns. But when I was finally exposed to the topic of Estate Planning in my academic studies and throughout my preparation for the CFP exam, then I truly understood its deep significance and how the estate planning process encompasses so much more than I initially imagined. Even now, as a recent college graduate without dependents, I understand that while I may not “need” to have an estate plan prepared any time soon, the amazing benefits and peace of mind it can provide in the present-day and in the future make it worth the effort. Below are a few reasons why beginning to think about, prepare, or even update your estate plan NOW can both provide peace of mind in directing even more of what will happen upon your death or incapacity, and also ensure that your goals and passions while living can be achieved after death.

Back to the Future

By Echo Huang, CPA, CFP®, CFA

I recently returned from a 7-day trip back to my hometown, Shenzhen, China. To say I hadn’t been there in a while would be an understatement.  The last time I was in Shenzhen was in August of 1998 when my husband and I had a beautiful Chinese wedding ceremony at the China Folk Culture Village there, to which I invited almost my entire high school class (numbering 37) to attend. 

As a thriving and prosperous city right next to Hong Kong in southern China's Guangdong Province, Shenzhen is regarded as the premiere window into China's reforms and its policy of opening-up. As an international showpiece, the city also features many contemporary buildings, such as the 600 meter tall Ping An International Finance Centre, and a number of amusement parks.  Shenzhen is a major financial center in southern China. The city is home to the Shenzhen Stock Exchange as well as the headquarters of numerous high-tech companies. 

Congratulations to Tyler Lodahl!!!

By Echo Huang, CPA, CFP®, CFA

We are excited to announce that our newest employee Tyler Lodahl has successfully passed the rigorous CFP® certification exam in November!  Tyler has been with Echo Wealth Management since July 2016, working as Associate Wealth Manager by fostering collaborative relationships with our private and corporate clients.  He assists Echo in delivering personal financial planning service using Echo Dashboard and office operations.  Starting in December, he will increasingly aid in a larger role directly serving clients, taking on similar responsibilities as his colleague Steve Drost. 

Tyler earned a BS degree in Personal Finance and Spanish from the University of Wisconsin- Madison, 2016, Graduated with Highest Distinction.  He completed the CFP® education requirements in college.  With the successful completion of the CFP® exam, Tyler will be able to bear the CFP® marks in August 2018, upon satisfying the final requirement of two years of Apprenticeship experience that meets additional requirements. 

Why Would I Want to Defer Compensation?

By Steve Drost and Echo Huang, CPA, CFP® and CFA

An old proverb states “A bird in the hand is worth two in the bush” suggesting one should be content with what they have (or will have shortly) rather than roll the dice on the unknown.  One who wholeheartedly believes in this proverb may react swiftly and decline to enroll in their employer-offered deferred compensation plan.  This could be perceived as a rational decision; why would you want to receive a portion of your salary or bonus in 5+ years when you can receive it now?   What benefits could there be to electing to give up your bird, or compensation, and “roll the dice” on the unknown?

Currently regulated by Section 409(A) of the Internal Revenue Code (IRC), nonqualified deferred compensation (NQDC) plans allow employees to move earned income from one year to future years, thus allowing for income tax and cash flow planning opportunities.  This is different from deferred compensation in the form of elective deferrals to qualified plans (such as a 401(k) plan) or to a 403(b) or 457(b) plan.  By moving earned income to future years, you can reduce the current year’s taxable earnings which can be extremely beneficial during high earning years.  In the example below, assume a single person expects to earn a salary of $200,000 and receive a bonus of $100,000 in 2017 and then retire in 2018.  Let’s assume he has expected portfolio interest income of $50,000 (starting in 2017 and continuing) and will receive $20,000 per year from social security during retirement.  Lastly, to make the comparison simple, assume all figures below are in “taxable income” before applying the tax rates by ignoring the deductions and personal exemptions. In Figure 1 you will find this individual’s total income, total taxes due, effective tax rate, and then the amount of money taxed at their marginal tax bracket for 2017. Column 2 displays the outputs assuming he did not elect to defer any compensation.  Note that his effective tax rate is over 28% and that $158,349 (which is mainly comprised of his bonus) is taxed at 33%.  Now suppose he defers his bonus to 2022; he elects not to receive the funds in 2017 but rather receive the payment in 2022.  Notice the significant drops in both the individual’s effective tax rate and the portion of income taxed at his highest bracket, the 33%.

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