We are excited to share the inaugural version of Confluence Financial Partner’s Market Pulse: A Quarterly Review of Investment Trends and Insights. We aim to succinctly recap key investment trends and events on a quarterly basis, while providing insightful and actionable outlooks for the coming months. 

Q4 2024 Insights: Three Key Takeaways

Policy Shift: 2024 saw the Federal Reserve shift gears and lower interest rates, ending the rate hiking cycle that began in June 2022 and featured 9 rate hikes.

Mega Leadership: Mega cap stocks, the largest companies in the US, pulled the S&P 500 to a second consecutive +25% annual gain, outpacing smaller stocks, international stocks, and bonds.

High Concentration: The mega cap leadership resulted in a very narrow market by historical standards: the top 10 stocks in the S&P 500 represent over 38% of the index (highest in over 40 years).

As we enter the new year, don’t wait to implement tax strategies that could improve your financial situation. For investors, smart tax strategies can mean keeping more of what you earn and maximizing the value of your portfolio. Here are some key approaches to consider as you plan for 2025:

1. Maximize Tax-Advantaged Accounts*

Contributing to tax-advantaged accounts like 401(k)s, IRAs, and Health Savings Accounts (HSAs) can reduce your taxable income. For 2025, the 401(k) contribution limit is $23,500 for those under 50, with an additional $7,500 catch-up contribution for those 50 and older. A new provision allows individuals aged 60 to 63 to make an enhanced catch-up contribution of $3,750 in addition to the traditional catch-up contribution, providing a significant opportunity to boost retirement savings during those critical pre-retirement years.

Traditional IRAs also allow for tax-deferred growth, and contributions may be deductible depending on your income and retirement plan coverage.

Roth accounts, while funded with after-tax dollars, offer tax-free withdrawals in retirement—a great option if you expect to be in a higher tax bracket later.

2. Utilize Qualified Charitable Distributions (QCDs)**

If you’re 70½ or older, a Qualified Charitable Distribution (QCD) allows you to donate up to $108,000 directly from your IRA to a qualified charity. This strategy not only satisfies your Required Minimum Distribution (RMD) but also reduces your taxable income. By directing funds straight to the charity, you avoid having the distribution counted as part of your Adjusted Gross Income (AGI), which can help minimize taxes on Social Security benefits or Medicare premiums. This approach is particularly advantageous for retirees who wish to support charitable causes while managing their tax liabilities efficiently.

3. Gift Appreciated Securities

Instead of donating cash or selling investments to give proceeds, consider gifting appreciated stocks or mutual fund shares directly to family members or charities. By gifting to family members in lower tax brackets, they may pay significantly lower taxes on the capital gains, or possibly none at all, depending on their income level. For charitable donations, you can deduct the fair market value of the securities while avoiding the capital gains tax you’d incur if you sold them. This dual benefit maximizes the impact of your gift while offering meaningful tax savings. It’s a smart way to reduce the tax burden on highly appreciated assets.

4. Be Strategic with Municipal Bonds

Municipal bonds, often referred to as “munis,” offer a reliable source of tax-free interest income at the federal level. If you purchase bonds issued by your home state, you may also avoid state and local taxes. For high-income earners, the tax-equivalent yield of municipal bonds can be more attractive than taxable bonds, especially if you’re in the highest federal income tax brackets. Additionally, municipal bonds are generally considered lower-risk investments, providing steady income without increasing your taxable income—a win-win for those seeking both stability and tax efficiency. Whether you should own taxable or tax-free bonds, however, is unique to each individual and should be analyzed as such.

5. Stay Informed on Tax Law Changes*

Tax laws are dynamic, and staying informed helps ensures you’re prepared to adapt your strategy to new opportunities or avoid pitfalls. The individual tax cuts introduced under the 2017 Tax Cuts and Jobs Act (TCJA) are set to expire at the end of 2025 unless new legislation extends them. This includes potential increases in individual income tax rates, a reduction in the standard deduction, and a lower threshold for estate tax exemptions, which may revert to pre-2018 levels—around $7 million per individual instead of the current $14 million. By monitoring legislation, you can adjust your portfolio and tax strategies proactively.

Take Action Now

The key to effective tax planning is proactive management. By leveraging these strategies, you may be able to reduce your tax bill and keep more of your income in 2025. Don’t wait until the end of the year to start planning! Schedule a consultation with one of our experienced wealth managers today to discuss personalized strategies that align with your financial goals.

Sources:

*https://www.morningstar.com/personal-finance/your-tax-fact-sheet-calendar

**https://www.schwab.com/learn/story/reducing-rmds-with-qcds#:~:text=What%20are%20the%20QCD%20limits,charitable%20gift%20annuity%20(CGA).

Confluence Financial Partners does not provide tax advice. You should consult your own tax advisors before engaging in any transaction.

When it comes to estate planning, your beneficiary designations are one of the most critical yet often overlooked components. These designations determine how your assets—such as retirement accounts, life insurance policies, and annuities—are distributed upon your passing. Beneficiary designations often supersede other estate documents, making it essential to ensure they are accurate and up to date.

Understanding the Key Difference: Per Capita vs. Per Stirpes
When naming individual beneficiaries, two terms that frequently come up in this context are “per stirpes” and “per capita”. While these terms may seem similar, they represent very different ways of dividing an inheritance among your heirs.

What is “Per Stirpes”?
The term per stirpes translates to “by branch” and refers to dividing an estate among the branches of a family. This method ensures that if an heir predeceases you, their share will be passed on to their descendants. In other words, per stirpes keeps the inheritance within a specific family line.

Example: If you have three children, but one of them passes away before you, the deceased child’s share would be divided equally among their children (your grandchildren). The remaining two children would each receive their full share, and the deceased child’s share would be inherited by their descendants.

Many companies offer equity compensation programs to attract, motivate, and retain top talent while conserving cash and aligning the interests of the employees and shareholders. While these incentive programs provide a great benefit, they must be carefully managed to avoid upsetting your financial strategy or posing a significant tax burden. Below we discuss two of the most common stock option plans that we help our clients understand and maximize.

RSU – Restricted Stock Units

As an employee, you may receive a Restricted Stock Unit (RSU) grant as part of your annual performance assessment or generally as part of your overall compensation package. The majority of RSUs have a vesting schedule, so you don’t receive the full value from the outset (Your employer wants to schedule vesting over a period, rather than all at once, to retain your services!). For example, if your company grants you 400 RSUs, you’ll probably get 100 shares to vest each year (typically on a quarterly schedule) until you vest all 400 shares, at which time you may receive a new grant.

RSUs give you an interest in the company but no actual value until they are vested. Upon vesting, the Fair Market Value (FMV) of the shares is considered income. You will then have the right to sell the vested shares and receive the cash proceeds or hold the shares for a longer period.

Regarding Taxes

Your income will include the FMV of the shares as they vest. You can sell your vested shares and convert them to cash. Alternatively, you may keep the shares, but any gains made after the vesting date would be taxed as capital gains when you sell. If you hold shares and they drop in value, you might be faced with selling those shares at a loss, while paying tax on vesting date FMV you never actually received.

Your employer typically handles your tax withholding at the vesting date by selling enough shares on your behalf to cover the estimated tax liability and distributing the remainder to you. The IRS requires a statutory 22% withholding rate. Because your vested RSUs influence your taxable income, and effective tax bracket, your employer’s tax withholding rate may not be enough.

Strategy

RSUs accrue over time and, if held, can lead to a significantly consolidated position in one firm. An experienced executive might start with 100 shares vested, then 200, then 300, and so on. Suddenly, they discover that a sizable chunk of their holdings, perhaps also a significant percentage of their net worth, consists of company stock.

Accumulation of company stock can lead to more than just lack of portfolio diversification. Generally, having a sizable stock position in the same company that also pays your salary isn’t advisable. If that organization, for a myriad of reasons, experiences a downturn this could have a double-whammy effect.

As a result, it may be advisable to sell all RSUs as they vest. There should be no additional taxes owed, because your costs basis will be the FMV at which you received the stock. In fact, keeping RSUs as they vest is the exact same thing as taking each cash bonus and investing it 100% in your company stock. If you wouldn’t do that, you shouldn’t hold all of your RSUs. By converting the shares to cash you will be better able to manage taxes due and invest proceeds in a more diverse manner. This should provide you with greater and more predictable long-term success.

March is National Nutrition Month!

This dedicated span of time encourages us to spotlight the significance of nutrition and healthy eating, recognizing this as a core pillar to both mental and physical well-being. I’m excited to dive into a topic that holds a special place in my heart – metabolic health. See below an introduction, as we explore how choices we make in dietary habits play a crucial role in shaping metabolic well-being – and what that even means!

The human body is intricately detailed and complex, similar to a car. While many of us don’t comprehend a car’s inner workings, we can sense when something is “off” and impacting optimal functionality. Similarly to a check engine light flipped on, there are many cues the body gives that it’s utilizing food for fuel less than optimally, such as the following: cravings, weight struggles, energy slumps, relentless fatigue, etc. Sadly, many of us have ignored these signals for too long.

The engine of the car is likened to the body’s metabolism. Just as the engine converts fuel into usable energy so the car can operate, being in good metabolic health ensures our body is able to generate and process energy efficiently to sustain life.

What factors determine metabolic health, you may wonder?

Clinically, it hinges on five specific and measurable factors¹:

1. Abdominal obesity (>40” around waist in men, >35” around waist in women)
2. Impaired fasted blood sugar (100 mg/dL or higher)
3. High blood pressure (130/85 mm/Hg or higher on multiple occasions or on medication for high levels)
4. High triglycerides (type of fat; 150 mg/dL or greater or on medication for high levels)
5. Low “helpful” cholesterol (HDL) levels (<40 mg/dL for men, <50 mg/dL for women)

According to the recent study published in the Journal of American College of Cardiology in July 2022, it’s estimated that only ~7% of adult Americans adults have optimal metabolic health, leaving 93% with markers in unhealthy ranges².

Each marker out of range increases the risk for development of complications like heart disease, Type 2 Diabetes, or stroke. Three or more out of range is considered metabolic syndrome. Getting an annual physical exam and bloodwork empowers your healthcare provider to evaluate your risk for metabolic syndrome. The good news is that lifestyle choices highly influence the health of these markers – namely eating a balanced diet and shunning a sedentary existence as two very practical realms to target.

Balanced Diet

Nutritionally, a balanced diet revolves around diverse, nutrient-rich whole foods while limiting processed items. A simple example of this would be choosing an apple (whole form) as opposed to apple sauce or apple juice, as often as is doable. This is due to the quality of nutrients the whole form contains as opposed to added processing.

When it comes to energy, the body’s preferred fuel source is glucose (think of this like gasoline), which comes from eating carbohydrates (carbs). In simplest terms, when we eat foods containing carbs, our blood sugars rise (as we expect). In those with good metabolic health, the body efficiently takes that glucose and converts it into usable energy and blood sugar levels are returned to normal through a process of hormonal “checks and balances”.

Conversely, poor metabolic health impedes glucose being used for energy efficiently, but rather leaves it in the blood stream, hence the term “high blood sugar”. When levels are high in the moment, you may experience the check engine symptoms listed above. Over time, chronically elevated blood sugar levels can lead to conditions like Type 2 Diabetes. When it comes to managing blood sugar levels – a quick tip you can implement today is the principle of “no naked carbs”.

No Naked Carbs

Clothing your carbs so they’re not “naked” means simply to pair a carb food with a protein or fat source to promote a steadier blood sugar response and limit a “spike” which may result from eating a carb only. Some examples would be peanut butter with a banana, cheese with crackers, or a hard boiled egg with grapes. This is just one simple tip to promote keeping your “engine” in tip-top shape, which will keep your body operating more efficiently in the moment and the long haul.

Sedentary Lifestyle

A sedentary lifestyle can be described as one marked by excessive sitting, lying down, and not engaging intentionally in physical activities that would increase heart rate or test muscle tone. For many Americans, especially depending on time of year and where one lives, this can include commute time to work, working from home sitting in front of a computer for most of the day, television watching, video game playing, etc.

Lack of movement, especially after eating food, can be disadvantageous for metabolic health as it can promote an “insulin resistant” state. Movement, like exercise (as simple as walking at a brisk pace or weight lifting) can promote “insulin sensitivity” which allows the body to utilize the incoming sources of foods more efficiently. The U.S. Department of Health and Human Services recommends the American adult to engage in physical activity categorized as moderate-intensity of 150 minutes per week and optimally 2 days of muscle strengthening, also³. This helps not only with metabolic health, but weight maintenance, mood, increasing “helpful” cholesterol (HDL), increasing creativity and promoting longevity, among many other benefits.

No matter where your starting point is, it’s time to get moving!

Let’s get your engine in check!

This introductory overview offers a flyover look into the intricacies of metabolic health, distinguishing between manifestations and potential risks. I hope you are encouraged that lifestyle factors like what you eat (good nutrition) and how much you move (exercise) can greatly reduce your risk for chronic disease, keeping your “engine” operating efficiently. By fostering awareness of the importance of metabolic health, we can be proactive in our approach to reducing risk factors. Time to take a look “under the hood” of your car!

Bear Markets – Did You Know?

If you’ve watched the news or browsed the web at all recently, no doubt you have seen the term “Bear Market” quite frequently. This term is often used when the worlds’ stock markets go through difficult periods, but what does it mean? And what should investors do about it? Here are five points to consider that will hopefully offer you perspective and confidence:

1. What is a Bear Market? A bear market is generally defined as a stock market decline of at least 20%. The recent market decline (S&P 500) we’ve experienced in 2020 went from the peak in February to the trough in March of -34%.
2. How often do bear markets occur? Since 1949, the S&P 500 has experienced 10 declines of at least 20%, or one every 7 years on average.
3. How long do they typically last?  Since 1949, the average bear market has lasted about 14 months. The average bear market total return was -33%.
4. Bull vs. Bear – Good News! Since 1949, the average bull market has lasted nearly 5 times as long as the average bear market. The average bull market lasted about 71 months and had an average total return of 263% over that time period.
5. A $10,000 hypothetical investment in the S&P 500 in 1980 (with dividends being reinvested) would have grown to more than $870,000 by the end of 2019. During that time period, the investor would have experienced 4 bear markets, 20 market corrections of 10% or more, and 5 recessions.

Key Takeaway: As difficult and unsettling as bear markets can be, it is important to understand that we “earn” the bull markets by being disciplined and patient during the bear markets. The reason that equities can make relatively high returns over time is that those returns are unpredictable in the short-term.

Sources: Capital Group, RIMES, Standard & Poor’s, 2020; MFS Market Insights, 2020; Vanguard Understanding market downturns, 2020; JP Morgan Guide to Markets, 2020.

Traditional 401(k) vs. Roth 401(k)

Retirement plans can be confusing – we know! The decision of whether to contribute to a Traditional 401(k) or a Roth 401(k) is one that many people have or will encounter at some point in their lives. Although these two types of retirement accounts are very similar, they also have key differences. As more and more employers begin to offer a Roth 401(k) option, you should make sure that you have an understanding of each so that you can make the most informed decision possible.

What is the difference?

The main difference between a Traditional or Pre-Tax 401(k) and a Roth 401(k) is the tax impact. With a Traditional 401(k), you receive a tax benefit for your contribution now, but are taxed on the withdrawals later. A Roth 401(k), however, does not provide a tax benefit now. As a result of paying tax on your contribution now, the Roth option allows for tax-free withdrawals later.

Here is a quick example to help explain the tax difference between the two options. This year, if you contribute $10,000 to a Traditional 401(k) and were taxed at a fictional rate of 15% (this would depend on your tax bracket) the $10,000 contribution would decrease your current year taxes by $1,500. If you contributed $10,000 to a Roth 401(k) instead, there would be no reduction to your current year taxes. If we fast forward to retirement and assume the $10,000 contribution is now worth $50,000, there will again be a difference between the two upon withdrawal. If you made a withdrawal of the entire $50,000, the full $50,000 would be taxed at your retirement tax rate with a Traditional 401(k), but the entire $50,000 would be withdrawn tax-free if it were originally invested in a Roth 401(k).

As you can see, the current tax benefit is greater with the Traditional 401(k), but the future tax benefits are better upon withdrawal from a Roth 401(k). One other item to note is that these facts hold no matter what the withdrawal amount is. No matter the amount, a withdrawal from a Traditional 401(k) is generally all taxable and a withdrawal from a Roth 401(k) is generally tax-free.

Which is right for you?

Unfortunately, the answer is that it depends. The primary question to ask yourself is: will my tax rate now or during retirement be higher? If you are in the beginning of your career or expect your income during retirement to be more than it is today, a Roth 401(k) may be right for you. If you believe your tax rate now is going to be higher than what it will be during retirement, then a Traditional 401(k) may be the best option for you.

Another advantage of the Roth 401(k) is that in addition to your original contribution, the growth of the account can be withdrawn tax-free! This is not the case with a Traditional 401(k). Also, if your employer provides a contribution match, you would need to pay tax on this portion of your account at the time of withdrawal whether you use a Traditional or Roth 401(k) as it is a pre-tax contribution.

Other considerations

There are several other differences between the Traditional and Roth 401(k) options that you may want to consider.

• Required minimum distributions (RMDs) – Beginning at age 72, there are required minimum distributions from both 401(k) options unless you are still working. However, a Roth 401(k) could be rolled over to a Roth IRA. Unlike Traditional IRAs, Roth IRAs do not have required minimum distributions.
• Estate planning – Inheriting a Roth retirement account is more beneficial to your heirs than a Traditional account. This is because they would generally not have to pay tax on distributions from the inherited Roth account, whereas they would have to pay tax on distributions from the Traditional.
• Law changes – Just as we can’t predict what your future tax rate will look like we also can’t predict law changes that could occur. Any law changes during your lifetime could change the results of this decision for yourself or your heirs. For example, the recent SECURE Act pushed back RMDs from age 70 ½ to age 72. It also requires an inherited IRA to be distributed within 10 years of inheritance rather than over the beneficiary’s lifetime. This could be a reason to contribute to both a Traditional and a Roth 401(k) to give yourself tax diversification across different accounts. Many employers will allow you to split your contributions between the two.

Conclusion

In summary, there is no easy answer to what type of 401(k) option is better. The decision will depend on your individual circumstances and most likely will change throughout your life. Using the information above should hopefully give you a good starting point to be able to make the most informed decision possible.

Please don’t hesitate to reach out to us if you would like to discuss further!

401(k) plans are long-term retirement savings vehicles. Withdrawal of pre-tax contributions and/or earnings will be subject to ordinary income tax and, if taken prior to age 59 1/2, may be subject to a 10% federal tax penalty. Roth 401(k) plans are long-term retirement savings vehicles. Contributions to a Roth 401(k) are never tax deductible, but if certain conditions are met, distributions will be completely income tax free. Unlike Roth IRAs, Roth 401(k) participants are subject to required minimum distributions at age 72. RMD’s are generally subject to federal income tax and may be subject to state taxes. Consult your tax advisor to assess your situation.

Any opinions are those of Gregory Weimer and Chuck Ziants and not necessarily those of Raymond James. This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Expressions of opinion are as of this date and are subject to change without notice. You should discuss any tax or legal matters with the appropriate professional.