News & Insights

In last month’s Viewpoint, Dan Krstevski outlined Individual Retirement Account (IRA) distribution rules and alluded to legislation making its way through congress called the SECURE Act.  SECURE stands for “Setting Every Community Up for Retirement Enhancement.”

 We don’t usually like to talk about pending legislation in Washington, but almost all the changes to 401(k) and IRA retirement saving plans contemplated within the legislation enjoy strong bipartisan support.  The House passed the SECURE Act on May 23rd by vote of 417-3.  While not yet taken up in the Senate, support for the legislation is nearly universal.  President Trump has also expressed his desire for these retirement changes.  The late Steve Jobs used to say, “It’s not done until it ships,” which is quite true in this day of divided government.  However, we feel the changes contemplated by the SECURE Act are significant enough that they may impact your retirement and estate planning decisions.

With an effort to increase the American retirement savings rate, Congress established Individual Retirement Accounts (IRAs) through the Employee Retirement Income Security Act of 1974.  IRAs have greatly advanced since their creation, allowing for tax-deferred, and in some cases tax-free, growth of retirement assets.  Also, they allow greater contribution limits and catch-up contribution provisions for older participants.

 It is easy to find advice on the contribution rules for IRAs, with little emphasis on the withdrawals.  That is why we will spend our time focused on the distribution rules of assets from your retirement account. Whether you’re taking early withdrawals, normal withdrawals, borrowing or gifting from your accounts or have a required minimum distribution due, you need to be aware of the rules and requirements in order to avoid costly penalties.

My five-year-old recently started t-ball and the games have been even more fun to watch than I imagined.  The kids are young enough that they don’t bother to keep score and the concept is just to introduce the game and help teach the rules.  Despite the best efforts of parents and coaches, there is a delightful regularity with which things tend to go awry.  Seeing a baserunner chase a ball his teammate hit into the outfield is something that never gets old.  Also, if you’ve never seen an entire team in the field swarm to a ground ball, I would recommend you catch a local t-ball game.  It’s great to see the kids enjoy themselves and full of entertainment for the spectators. 

 Baseball and investing have long been linked.  Nobody has done more to highlight the ties between the two than Warren Buffett, who hardly can conduct a single interview without making a baseball analogy.  He often talks about “no called strikes” in investing and waiting for the “fat pitch.”  My favorite baseball quote of his refers to focusing on underlying business performance instead of on stock price, “in investing, just as in baseball, to put runs on the scoreboard one must watch the playing field, not the scoreboard.”

Two recent developments have placed the financial status of older Americans in sharper focus.  One development was a report from trustees for Social Security and Medicare.  In 2020, Social Security revenue will be insufficient to pay benefits, requiring the fund to dip into its reserves for the first time since 1982.  By 2035, the reserves will be depleted unless steps are taken to shore up Social Security.  Beginning that year, according to projections, Social Security benefits would need to be reduced to the level of payroll tax receipts.  Medicare is expected to exhaust its reserves in 2026.

After the previous occasion when the Social Security Administration had to dip into reserves to pay benefits (1982), Congress and the President worked together to shore up the fund.  The payroll tax rate was increased, benefits became taxable to some recipients, and a program was put in place to gradually increase the eligibility age for full benefits.  The tax rate was raised a couple more times, most recently in 1990.  That was almost 30 years ago!

In December 2017, the Tax Cuts and Jobs Act became law.  This new law created sweeping changes to the tax code that has impacted the landscape for charitable giving.  For example, the standard deduction has been greatly increased, whereas some itemized deductions have been reduced or eliminated.  While tax deductions are not the sole motivating factor behind charitable giving, they are a nice added benefit.  If you itemize your deductions instead of taking the standard deduction, they can help reduce your tax bill.

 I know by this time of the year tax fatigue has set in and many households have closed the books on the 2018 tax year.  This is also a great time to evaluate your charitable giving in 2018 and decide whether you need to make any adjustments for 2019.  Asking yourself some simple questions can help narrow the appropriate charitable giving options in order to maximize the impact of your gift.  For example, are you 70 ½ and own a Traditional IRA or an Inherited IRA?  Do you own highly appreciated stock in a taxable account that you would like to sell?  How much are you planning to give?  Do you anticipate exceeding the standard deduction limit in 2019?  The chart below lists the standard deductions by filing status.

Dear Clients,

I have a favor to ask.  If you have a minute and the inspiration strikes, would you please reach out to me with any anecdotes or observations about how money has affected your family, for better or worse?

I’m particularly interested in relationships between parents and kids, something from your own childhood or something you encountered while raising your kids.  Don’t feel constrained though because relationships with siblings or extended family are complex and interesting too.  Anything goes.  You can anonymize your feedback as much as you like, although I’d point out that we never share our clients’ personal information anyway.

The line, “Sell, Mortimer!  Sell!” comes from the iconic 1980s movie, “Trading Places,” where the film’s heroes, played by Eddie Murphy and Dan Aykroyd, get the better of villains Randolph and Mortimer Duke while trading orange juice futures contracts—which is yes, a real thing.  In the pivotal scene, Murphy and Aykroyd have duped the Dukes into thinking they received an advance copy of the government crop report indicating there will be an orange shortage, meaning the price of orange juice will go higher once the report is officially released.  The Duke brothers, believing they have an information edge, place bets on the price of orange juice going up.  When the actual crop report is released it indicates instead that oranges are plentiful, the price of orange juice futures drops like a rock and the Dukes realize they’ve been had.  In the panic to unload their position Randolph Duke directs his brother to, “Sell, Mortimer!  Sell!”

President Trump often announces his policy interests through twitter.  Last August 17th he tweeted this:

“In speaking with some of the world’s top business leaders I asked what it is that would make business (jobs) even better in the U.S. “Stop quarterly reporting & go to a six month system,” said one. That would allow greater flexibility & save money. I have asked the SEC to study!”

It was later learned that the idea for dropping quarterly reporting came from a conversation with former Pepsi CEO Indra Nooyi that focused on ways to improve job growth.  Mr. Trump was quoted in the Wall Street Journal of semi-annual reporting: “I thought of it.  It made sense.  We are not thinking far enough out.”

The end of the year is a great time to review your finances.  Whether you’re still working or retired, there are changes you can make to ensure that you’re not leaving any money on the table.  These changes can help reduce your 2018 taxes and set up for a more financially sound 2019.  It might seem easier to procrastinate and push these financial decisions into the New Year.  However, timing is important when it comes to making some of the tax-related adjustments, many of which have a deadline that must be met by December 31.

No one likes to think about their demise.  However, like Ben Franklin’s ubiquitous saying goes, nothing in this world is certain except death and taxes.  This Viewpoint is a practical warning about steps you need to take, or need to have your elderly parents take if you are fortunate to still have them with us.

Without proper planning, successor trustees or executors could spend 6-9 months of their lives dealing with dozens of insurance companies, mutual fund providers, brokerage firms, and transfer agents in charge of dividend reinvestment programs (DRiPs).  Each firm has its own terminology, policies and procedures, and paperwork.  Many of these forms need to be notarized, have signatures guaranteed, or even have them “medallion guaranteed.”

The massive Equifax data breach occurred approximately one year ago, resulting in the theft of Social Security numbers, birthdates, names, addresses, and in some cases driver’s license numbers.  The number of individuals involved was staggering, nearly 147 million.  Shortly following the breach, Scott wrote a Viewpoint outlining potential countermeasures for individuals interested in protecting themselves from identity theft.  Not to fully rehash these alternatives but they included placing a fraud alert on your credit file, the use of a credit protection service, or a credit freeze.  Scott’s article is still accessible on our website, and given the prevalence of credit fraud, the use of one of these alternatives is worth strongly considering.

Although we consider ourselves money managers, not experts on taxes or charitable giving, we think our clients should be aware of a potential tool for optimizing tax and gifting strategies.

Donor-Advised Funds (DAFs) are charities whose purpose is to help donors give money to other charities.  They have existed for over 80 years and have recently enjoyed a surge of popularity.  DAFs are similar to private foundations in many ways, but they offer a cheaper, more accessible alternative for the 99.5% of people who don’t have the wealth or the energy to organize and administer their own foundations.