Here are two observations I have on life:

• Motivation does not sustain itself.
• Discipline and continued effort is a challenge.

Staying motivated in one specific area of your life is a very challenging proposition. In reality, we are multitaskers juggling the various demands of our lives and it’s next to impossible to always stay motivated with everything all of the time. With family, careers, social lives, technology, and health routines, we have to focus our energy on separate areas at different times. 

I suppose it’s technically impossible to maintain a disciplined and continued effort in all aspects of our lives, simultaneously. We have to set some things aside while focusing on the task at hand. Oftentimes these “moments” can start with a day, then end up being a week, a month, then years. Then the next thing we know an aspect of our lives becomes chronically neglected and deteriorates.

Financial health and planning for our futures is definitely one of those areas in life that can be neglected. Some people really just don’t know what to do. Some people know what to do but are just not motivated or disciplined enough to follow through day after day, year after year, decade after decade. Some people make the choice to focus on other areas in their lives that they have a passion for, and hire experts to maintain discipline and continued effort in their financial lives.

Having the freedom to choose what areas of life you want to focus on while hiring experts to maintain the health of other aspects of your life is both smart and liberating. I value my car mechanic and doctor equally for keeping me safe and healthy. A good financial advisor should do the same because It really takes an expert team and/or mentor to provide expertise, guidance, and motivation during those times you don’t feel motivated enough to keep your eye on the ball or choose to focus your energy elsewhere. 

So, take this as a friendly reminder to leverage the resources of your financial advisor so you can have peace of mind with your financial future as you pursue other areas of your life that you find rewarding.

New 529 Plan Opportunity

For those of you with or contemplating 529 plans for your children, the incentives to invest in these just became more enticing for some investors. Section 126 of the Secure 2.0 Act passed last year amended the Internal Revenue Code so that beneficiaries of 529 plans can roll over funds from their 529 accounts to Roth IRAs tax and penalty-free, effective for distributions after December 31, 2023.

Specifically, section 126 of the bill states in part that  “Beneficiaries of 529 college savings accounts would be permitted to rollover up to $35,000 over the course of their lifetime from any 529 account in their name to their Roth IRA. These rollovers are also subject to Roth IRA annual contribution limits, and the 529 account must have been open for more than 15 years.” 

There are additional guidelines and limitations to consider when contemplating funding strategies.

• Any contributions to the 529 plan made within the last 5 years, along with the related earnings, cannot be moved to a Roth IRA. 
• The 529 plan must have been in place for 15 years or longer.
• The maximum amount that can be rolled over from a 529 plan to a Roth IRA during an individual’s lifetime is $35,000. 
• A rollover of funds from a 529 requires that the owner of the Roth IRA have earned income, the same as making a regular Roth IRA contribution.
• The annual limit on the amount that can be rolled over from the 529 plan to a Roth IRA is equal to the IRA contribution limit for the year, less any other traditional IRA or Roth IRA contributions made for that year.  In other words, Section 126 does not increase the overall annual contribution limit to an IRA. 
• The Roth IRA must be in the name of the 529 plan beneficiary, not the 529 plan owner.
• 529 earnings rolled into a Roth IRA retain their characterization as earnings within the Roth IRA.  While Roth IRA contributions can be withdrawn tax- and penalty-free at any time, certain conditions must be met to withdraw earnings from a Roth IRA both tax- and penalty-free.   Accordingly, owners of Roth IRAs that were even partially funded by a 529 should consult their tax advisor if they plan to make an early, pre-retirement withdrawal from the Roth account.

From a planning perspective, I would consider 529 plans for its primary purpose, education funding. But it’s nice to know that if there are excess funds in the plan, you have other options beyond changing a beneficiary or using the funds for non-education purposes while having to pay penalties and taxes.

Please consult with your tax advisor regarding tax issues related to these strategies.

2023 Q2  Index Review Through June 30

Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Market segment (index representation) as follows: US Stock Market (Russell 3000 Index), International Developed Stocks (MSCI World ex USA Index [net dividends]), Emerging Markets (MSCI Emerging Markets Index [net dividends]), Global Real Estate (S&P Global REIT Index [net dividends]), US Bond Market (Bloomberg US Aggregate Bond Index), and Global Bond Market ex US (Bloomberg Global Aggregate ex-USD Bond Index [hedged to USD]). S&P data © 2023 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. MSCI data © MSCI 2023, all rights reserved. Bloomberg data provided by Bloomberg.

The second quarter delivered robust returns for the U.S. market delivering 8.39% which outpaced developed international, emerging, and global real estate indexes. As we know, there are periods where the U.S. stock market lags international markets and that’s one of the reasons that global diversification can be helpful.

Some investors though are only invested in the U.S. market which might lead them to miss opportunities elsewhere. So, how much of our portfolio should be invested in the U.S. vs international markets? A good reference point for us is the value (market cap) of the markets in different countries and use this as a reference point for relative global allocation across global markets.

Information provided by Dimensional Fund Advisors LP.

Market cap data is free-float adjusted and meets minimum liquidity and listing requirements. Dimensional makes case-by-case determinations about the suitability of investing in each emerging market, making considerations that include local market accessibility, government stability, and property rights before making investments. China A-shares that are available for foreign investors through the Hong Kong Stock Connect program are included in China. 30% foreign ownership limit and 25% inclusion factor are applied to China A-shares. Many nations not displayed. Totals may not equal 100% due to rounding. For educational purposes; should not be used as investment advice. Data provided by Bloomberg. Diversification neither assures a profit nor guarantees against loss in a declining market.

As can be seen, the U.S. represented 59% of the global stock market value as of December 31, 2022. This would be a good starting point in establishing how much of your portfolio should be allocated to the U.S. market.

Finally, I’ve included longer-term performance for selected indexes through June 30, 2023; below.

Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Market segment (index representation) as follows: US Stock Market (Russell 3000 Index), International Developed Stocks (MSCI World ex USA Index [net dividends]), Emerging Markets (MSCI Emerging Markets Index [net dividends]), Global Real Estate (S&P Global REIT Index [net dividends]), US Bond Market (Bloomberg US Aggregate Bond Index), and Global Bond Market ex US (Bloomberg Global Aggregate ex-USD Bond Index [hedged to USD]). S&P data © 2023 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. MSCI data © MSCI 2023, all rights reserved. Bloomberg data provided by Bloomberg.

Morgan H Smith Jr. is an investment advisor with WorthPointe, LLC, a registered investment adviser in San Diego, Calif. WorthPointe is registered with the Securities and Exchange Commission (SEC). Registration of an investment advisor does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the commission. WorthPointeonly transacts business in states in which the firm is properly registered or is excluded or exempted from registration. A copy of WorthPointe’s current written disclosure brochure filed with the SEC, which discusses among other things, WorthPointe’s business practices, services, and fees, is available through the SEC’s website at www.adviserinfo.sec.gov.

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Any hypothetical, backtested performance has been provided for illustrative purposes only, and is not necessarily, and does not purport to be, indicative, or a guarantee, of future results or the adviser’s skill. Hypothetical, backtested performance does not represent actual performance.  The results are prepared by retroactive application of a model, with the benefit of hindsight, and actual results may vary substantially. The preparation of such information is based on [UNDERLYING ASSUMPTIONS], and does not represent the actual performance of any fund, portfolio or investor, it is subject to [RISK AND LIMITATIONS] that are not applicable to non-hypothetical performance presentations. Although [ADVISER] believes any hypothetical, backtested performance calculations described herein are based on reasonable assumptions, the use of different assumptions would produce different results. For the foregoing and other similar reasons, the comparability of hypothetical, backtested performance to the prior (or future) actual performance of a fund is limited, and prospective investors should not unduly rely on any such information in making an investment decision.

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