Insights

Jul 31
Love0

The Death of the Stretch IRA

By Legacy

In our work with families that span generations, we plan for IRAs to be passed down to children or grandchildren so that they can continue to harness the power of tax deferral for up to another 50 years. Think of how powerful that is. Being able to stretch IRA distributions over a beneficiary’s entire lifetime led to essentially an additional lifetime of tax free growth as long as there was no immediate need for the inheritance.

In December 2019, the SECURE Act was passed into law which made some important changes to our current tax legislation, one being the introduction of the 10 Year Rule for inherited IRAs. The 10 Year Rule mandates that a non-spousal beneficiary must distribute the entire inherited IRA by the end of the 10th year after the inheritance.

There are not any requirements for when you distribute the income within those 10 years, and this opens the door for some planning opportunities in certain circumstances. The main goal of this planning strategy is to recognize income in years where you can fill up your lower tax brackets with the income. If your income will be unchanged for the entire 10 years, just taking even distributions of 1/10th of the account would likely make the most sense.

However, if you know that your income will likely have some large spikes up and down over the next 10 years, there are certain years that will be better to recognize more income. Like anything with a 10 year time horizon, you don’t know exactly what your income will be each of the next 10 years, but there are some situations where you can make some really solid predictions.

Perhaps the easiest situation to understand was if you received the inheritance shortly before you planned to retire. If you received the inheritance at age 58 and you were planning to retire at age 65, your income will drop drastically when you retire and you could then distribute the account over those next few years filling up the lower tax brackets instead of recognizing that income on top of your regular income prior to retirement.

Or you could have a situation where you are coming up on the prime of your career in the next 5 or so years and are expecting a promotion with a large pay increase. In a situation like that it would make sense to take more out in your first few years before you potentially jump up to a higher tax bracket.

Another situation would be that you are planning to make a career change or start a new business and you expect to have one or two years with little to no income over the next 10 years, in this situation you would distribute as much as you can to fill up lower tax brackets in those years with minimal income.

Regardless, if you or anyone that you know have inherited an IRA over the past 6 months, or receive one in the future, it is crucial to keep these changes in mind and we invite you to please contact us if you would like our help in formulating a strategy for your distributions. Situations like this are easy to ignore and maybe you plan to focus on it at another time, but these types of strategies are best to implement as soon as possible so that you don’t have to play catch up later down the line. If you do not make any distributions over the 10 years after you inherit the account, you will be forced to distribute the entire account at the end of that 10th year. Depending on the size of the inherited IRA, this could leave you with a large and unexpected tax burden.

Jun 05
Love0

Important Portfolio Update

By Investments

We are updating you on changes we are making to your investment portfolio.  You have been and will continue to receive notices of any trading via email or direct mail if you have not signed up for electronic delivery.  All records are available online for 10 years so there is no need to retain paper notices.  We recommend electronic delivery for everyone as the best way to protect your personal information, particularly when all information is easily accessible in a secure way online.

Equities:  We are increasing the allocation to stocks due to short-term factors which are supporting a rebound in prices.  The rebound was predominately led by technology stocks, particularly the largest stocks such as Apple, Amazon, Google, Facebook and Microsoft.  They are currently selling near or at all-time highs despite economic conditions.  The rest of the global market has not done nearly as well.  Many asset classes are still selling 20% or so below their highs.  We are seeing short-term opportunities to earn a decent return in these asset classes.  International stocks are looking particularly attractive due to stabilizing economies and the ECB has just announced major financial support which should improve the near-term outlook.

Fixed Income:  With extraordinarily low interest rates, we have also increased exposure to the broader bond market to try and capture some additional return.

Markets are forward looking and below is the sentiment we want to capture with the additional investments.

  • We have record levels of joblessness (exceeding levels reached in the Great Depression) but there is a promising trend in people being called back to work as the total number collecting unemployment starts to fall as evidenced by the jobs report this morning.
  • Restrictions on economic activity are loosening with a corresponding strong increase in economic activity, albeit from a very low base.
  • Deaths due to COVID-19 are trending lower. Other metrics such as ICU patients, hospitalizations and cases in high population density metropolitan areas are decreasing.
  • The national saving rate has dramatically increased with all the stimulus, much smaller job losses among higher income professionals and no place to spend money. The translation is there is a lot of cash in our economy for both a spending rebound and supporting investments.
  • Interest rates are again at record lows for borrowers, even though credit standards have tightened. This should help the real estate markets and larger consumer purchases.

But we cannot be complacent.  There are still significant risks.

  • COVID-19 infections will likely return in the fall We do not know the potential severity or breadth of any future outbreak. It is even within the realm of possibility the virus may mutate to a significantly less virulent form.  We still do not have adequate therapeutics to treat infections.  As for a vaccine, we are all hopeful the extraordinary efforts to develop a vaccine will be effective sooner rather than later.  But we also need to keep in mind this fact.  There are seven coronaviruses that are known to affect humans.  There is not an effective vaccine for any of them.  These are real risks to keep in mind to determine if human behavior – whether voluntary or mandated by guidelines and various levels of government – remains constrained and continues to drag on the economy, or how quickly consumers can return to much closer to normal.
  • The trade war with China is real. It does not matter what side you fall on the trade debate there are two underlying facts.  Any conflagration is likely to impact stock markets.
    • China is a formidable competitor and has not followed international law or conventions pertaining to intellectual property. They have aggressively been co-opting (a charitable interpretation) technology to build their domestic capabilities.  With substantial numbers of college graduates, particularly in the technology, science and engineering fields, (a larger number than our own country), they are expanding their economic power to the most profitable knowledge-based industries.  This includes their military capabilities as well.
    • Trade wars have a cost, they reduce economic activity and may not be effective.
  • Prior to COVID-19, federal government spending was 35% higher than revenue and intermediate term government bond interest rates due to Federal Reserve actions were trending at or below inflation (where 1.6%-2.4% above inflation would be the norm). With this kind of stimulus, it does not matter what political party is in power.  With nearly full employment, much of this money will find its way into investments.  With stimulus spending, the government is projected to spend about twice the expected revenue in the fiscal year ending October 2020.  Take a moment to think about those numbers.  If you were spending 35% more than you were taking in, how long could you sustain it?  What about 100% more?  One clear consequence is going to be some level of higher tax rates, potentially reversing the positive effects on asset prices from recent tax cuts.

We are in a position to try and make sure your portfolios will provide financial security over a long period of time.  As an example, think back over the last 20 years.  In the year 2000, the S&P 500 reached a new record high.  11 years later, the S&P 500 was selling below that level.  We are now going on 11 years of the S&P 500 rising from the last market crash to new records.  Stocks were priced at the high end of their historical range based on earnings and the overall size of the market to GDP.  Now some stocks are approaching those levels again.  There is virtually no chance we will not eventually see lower price levels in the stock market than we have today.  While we hope to capture more return on this upswing, we will also use our techniques to limit the effects of any large sell-off if and when it occurs.

From the start of the pandemic to the outbreak of social unrest after witnessing cell phones capture the appalling murder of George Floyd, it is also time to reflect on the state of our nation.  For all our strengths, these events underscore underlying weaknesses in our system.  From health care to equal treatment under the law, from economic opportunity to the increasing wealth gap, we need to challenge ourselves as a country to do better.  Today the market seems divorced from all the bad news, but it will not always be the case. There are no guarantees markets will always go up.  Being able to adapt to changing circumstances will make a difference in the long run.

As always, we are available if you have questions.

May 22
Love0

Markets vs Economy — Illusion vs Reality

By Investments

As we head into the end of the week, the S&P 500 is close to holding a key support level around 2950 in the face of record GDP decline and unemployment.  The global economic toll does not lend itself to a story about an only one-month bear market followed by immediate, rapid recovery as we proceed towards large scale re-openings.  You can view the current market levels as positive news—the fiscal stimulus and Federal Reserve intervention is working, and the economy will return to some normalcy in short order.  Or another possibility, that this narrow exuberance is overly optimistic and markets will crash back to reality when the stimulus effect dies out.

Indeed, looking deeper into the numbers, five firms continue to dominate the S&P 500 returns.  Apple, Google, Microsoft, Facebook and Amazon represent 20% of the market value in the 500 stock S&P index.  Looking more broadly at global markets there has been recovery, but not nearly as robust as those top five companies.  And we have just completed an earnings cycle which included only the beginning of the virus-related shutdown.  Small-caps, international developed markets, emerging markets, value stocks and real estate are well beneath their pre-pandemic highs.  Bright spots outside of technology may be commodities such as oil and gold.  Oil does not come without its risks, but may benefit from extraordinary cooperation, which includes U.S. producers, to limit supply just as demand is starting to pick up.  Low production and increasing consumption could help prices recover rather quickly if production remains voluntarily capped.

Is it time to jump back in to equities?  The answer is very likely mixed.  There has been little economic good news since March.  We still do not have a good handle on when and if we will have an effective vaccine or effective therapeutics, and most important, if we will have a significant second wave later this year.  We still do not know how the last 2-3 months will change behavior, both in the short term and the long term.  We see increasing signs that globalization is under siege with likely negative effects on global growth and cooperation.  The relationship with China is becoming increasingly unstable, partly legitimate and partly political opportunism, but there are not many defenders on either side of the political aisle.

We have been adding some risk assets to portfolios in a measured way and will continue to do so.  We are being patient not to buy the most expensive stocks that have led this interim rally from the bear market, but are looking to take positions in asset classes which we feel will have a much higher probability of better returns from this point.  Any hiccup in the economic recovery narrative will send the market tumbling and it is likely the most expensive assets relative to earnings will get hit the hardest—the same ones that are leading the S&P 500 higher.  We believe there is a high probability we will see lower stock prices in the near future.

The bond market literally froze in March with prices for investment grade bonds dropping 10% or more before the Federal Reserve stepped in.  This was a striking event as it was a larger decline and disruption to the bond markets than in October 2008.  With Federal Reserve intervention, it appears the fixed income market has stabilized enough that we are comfortable moving out of higher levels of short-term treasuries yielding less than 0.5% into diversified managed bond funds. This could help provide modest returns on this part of your portfolio.

After analyzing this week’s closing prices as well as the end of the month next week, we will have a clearer idea on what changes outside of the fixed income holdings we will be making.

We wish everyone an enjoyable and safe Memorial Day weekend!

May 15
Love0

Required Minimum Distribution (RMD) Changes Under The CARES Act

By Retirement

The CARES Act has suspended Required Minimum Distributions (RMDs) for several retirement plans, but not all. We’ve separated out what retirement plans had RMDs suspended for 2020 and which were not impacted by The CARES Act.

Suspended:

  • IRA RMDs (Including SEP and SIMPLE IRAs)
  • Defined Contribution Plan RMDs (401(k) and 403(b))
  • Federal Thrift Savings Plan RMDs
  • Governmental 457(b) Plan RMDs

Not Impacted:

  • Defined Benefit Plan RMDs
  • Non-governmental 457(b) Plan RMDs
  • Annuitized Annuities held in IRA, 401(k), 403(b), and other Defined Contribution Plan Accounts
  • 72(t) Distributions
  • Qualified Charitable Distributions

This is great news if you have a retirement plan requiring RMDs that you do not need.

If your first RMD was due in 2020 for year 2019, you are in luck. The CARES Act suspends any RMD regularly due in 2020, so if you had turned 70 ½ in 2019, normally your first RMD due date would be April 1, 2020. That means if you had not taken your 2019 RMD yet, you will have 2 years of RMDs suspended due to The CARES Act.

What do you do if you already took unwanted RMDs for 2020? The simplest way to fix this is to use the 60 day rollover window which allows you to roll the distribution either back into the original account or into an IRA, but only if it is within 60 days from when you received the distribution. If your took your distribution after February 1st, 2020 the 60 day rule is waived and you have until July 15th, 2020 to roll your distribution back into a retirement plan. Keep in mind you can only do this once every 365 day period.

Any distribution taken from a retirement account, including RMDs, that was distributed as a result of the Corona-virus is given 3 years to roll the distribution back into an account.

It makes sense in some cases to make a Roth conversion with your RMD. In this strategy you would still be paying taxes on the distribution now, but the money would receive tax free growth in your Roth IRA.

Contact us if you have any questions regarding your RMDs. If you would like to learn more about Corona-virus related distributions, directly from the IRS, we encourage you to do so here.

Mar 02
Love0

Welcome

By Uncategorized

Over the past few months we have made large renovations to our office and website. As a part of our website renovation, we are introducing this Insights page where we will be regularly posting content.

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