Welcome to the February edition of FAQs and RAQs!
Here we answer client questions, some asked Frequently and others asked Rarely.
FAQ: The S&P 500 is approaching 5,000 and has made new all-time highs. Should I be concerned?
The stock market’s climb to new peaks may stir unease. But in reality, making “new highs” is part of the market’s normal rhythm. Since World War II, the S&P 500 has surged from under 300 to the 5,000 range today, making numerous “all time highs” along the way without recording new ‘all-time lows.’
Some might view these peaks as signs of the market entering a bubble. However, more commonly, these new highs are the market’s way of turning the page on history – leaving behind past challenges and looking forward to future possibilities.
Additionally, consider these eye-opening statistics that put the market's march higher into perspective1:
In 1999, there were more than 7,000 listed companies in the United States. Today there are 3,700.
In 1999, Americans contributed $225 billion to retirement accounts. In 2024, it could exceed $800 billion.
Given the surge in demand for assets, and the supply of publicly traded companies dwindling, should we view today's all-time highs as a bubble, or just the market's natural progression?
Gain more insights into the significance of market highs by watching our latest video: (link).
FAQ: I’m benefitting from the high rate of interest on my money market fund. But what if the Fed decides to reduce rates? Are there other options to consider?
High interest rates on money market funds are a welcome result of Federal rate hikes. However, if the Fed decides to cut interest rates, these high returns might not last.
As an alternative, consider a “ladder strategy” for short-term Treasuries: buy bonds at staggered maturities – 3 months, 6 months, 9 months, and so on. You’ll lock in today’s high rates. Plus, Treasury securities are safe and easy to buy and sell.
Remember, however: treasury bond prices fluctuate daily. If you wish to have a completely stable portfolio, money market funds may still be your best bet.
FAQ: Could the issues in commercial real estate lead to a bear market in stocks?
Given that these issues stemming from the pandemic have been well-known for years, their impact on the broader economy is likely to be limited. Banks and real estate operators have had ample time to adjust.
Commercial real estate troubles may still harm the economy, but the kind of massive shock that causes recessions typically are those that take investors by surprise, such as the mortgage crisis in 2008.
Moreover, not all segments of the commercial real estate market are suffering. Sectors such as warehouses, data centers, and retail spaces catering to remote workers have shown resilience and growth.
RAQ: I’ve made after-tax contributions to my 401k plan. Now I’m ready to retire. What are my options?
For investors with after-tax contributions in a 401k, it’s important to separate the after-tax contributions from the pre-tax earnings to ensure proper tax treatment.
Here is one possible course of action:
- Rollover the After-Tax contributions to a Roth IRA: This option allows for potentially tax-free growth and withdrawals, subject to Roth IRA rules.
- Rollover the earnings on the contributions to a Traditional IRA : The earnings on after-tax contributions in a 401k are taxed as ordinary income upon withdrawal, and are suitable for a traditional IRA.
Segregating the rollover this way can potentially minimize the lifetime taxes paid on retirement assets.
What about taking the after-tax contributions in cash? This is another option, but it’s crucial to consider the implications:
- Immediate Taxation: Any earnings on your after-tax contributions will be taxed as ordinary income in the year you take the cash out.
- Early Withdrawal Penalty: If you’re under 59½, you might face a 10% early withdrawal penalty on the earnings portion of the distribution.
- Loss of Tax-Deferred Growth: Withdrawing in cash means you lose the potential for tax-deferred growth on your investment.
- Consider Your Financial Needs: Evaluate if the immediate cash is worth the potential long-term benefits you would otherwise gain by leaving the money invested.
As always, it’s important to consult with your tax accountant and financial advisor to understand the full impact on your individual tax situation and retirement strategy.
Have a question? Drop us a line at carlsongroup@rwbaird.com. We'd love to hear from you!
1 Source for supply and demand data: CNN, Center for Research in Security Prices, U.S. Department of Labor Private Pension Plan Bulletin Historical Tables and Graphs.
All investments carry a level of risk, including loss of principal. PAST PERFORMANCE DOES NOT PREDICT FUTURE RESULTS. It is not possible to invest directly into an index.