News & Insights

As tax season winds down and you start digging yourself out from underneath piles of tax documents and financial statements, this makes an ideal time to simplify your finances by consolidating accounts. A great place to start would be with your former employer-sponsored retirement plans. If you participated in a workplace retirement plan such as a 401(k) and changed jobs or retired, you have several options for that plan. You can cash it out, leave it alone, transfer it to your current employer’s plan or roll it over to an IRA. For many, making this decision can be a source of confusion and fear. It is for these reasons, many choose to forgo action, and miss out on opportunities.

In most circumstances, cashing out of your retirement plan is the least favorable of the four options. This is especially true if you are under the age 59 1/2, because you will pay a 10% early withdrawal penalty, in addition to income tax, on the distribution. Also, by cashing out the plan you will lose all future tax deferred growth which could prove costly over the long term.

Eleven years into this bull market, it’s déjà vu all over again. It is starting to feel like we are back in the bubble conditions of the 1990’s, or at least getting there. It is not so much the overall market that has me bothered. I am concerned about specific cases…a lot of specific cases. A slightly alarming number of stocks have come uncoupled from economic reality.

Let me start on a fairly positive note by saying that in the context of prevailing interest rates, overall stock valuations are not crazy—not in most cases anyway. In a world of ultra-low interest rates, it makes sense that stock valuations are levitating above historical averages. According to data from Finviz.com, for the 62 U.S. companies with market capitalizations over $100 billion, the median trailing P/E is 27. This equates to a median “earnings yield” of 3.7%, meaning $100 invested in large stocks is earning $3.70 in corporate profits. That is low by historical standards (valuations are high), but it looks okay compared to 10-year Treasuries yielding 1.4%. It is possible that the market continues to trade at roughly this same valuation for a long time, advancing at the rate that corporate earnings grow. The stock market is one of two places where things can go up without coming back down.

Last August I wrote about bipartisan legislation, the SECURE Act, that had passed the House in May but was stalled in the Senate as a few politicians pursued unpopular changes.  In early December, most of the Senate saw an opportunity to override this gridlock by attaching the bill to appropriation legislation that avoided a government shutdown.  This is how the SECURE Act became law after President Trump’s signature on December 20, 2019. For a summary of its major provisions, please see my August 2019 Viewpoint column under the “News & Insights” tab on www.investprovident.com.

Now that the SECURE Act has passed, I’d like to provide some additional information and comment on steps you might need to take as you think through tax and estate planning.  Before I do that, I’d like to correct one item in the August Viewpoint regarding Roth distributions.  My read of the legislation led me to think Roth distributions would avoid the 10-year accelerated distribution period for non-spouse and other specifically defined beneficiaries.  This is not the case as Roth distributions will be treated identically to traditional IRA distributions.

Americans are generally pleased with the quality of the healthcare they receive, but not its cost.  Healthcare inflation, while moderating during the previous decade, continues to outstrip overall inflation.  In response, employers are asking employees to bear more of their own healthcare costs, and government is increasing subsidies to help.

Health Savings Accounts (HSAs) were established as part of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 and evolved from other pretax healthcare programs.  An HSA is a personal savings account funded with pretax dollars that can be used to pay for qualified healthcare expenses.  While the Act is best known for providing a Medicare prescription drug benefit, the HSA has become increasingly popular with both employers and employees as the tax benefits have lowered both parties’ healthcare costs.

As 2019 draws to a close, it’s time to review your finances and look forward to the upcoming year.  The last few weeks of the year tend to be a mad rush to wrap up loose ends, usually in a frantic fashion.  Taking a few moments to calmly plan can help you take advantage of opportunities to grow your wealth and get you one step closer to reaching your goals.  Here are several brief topics of financial advice to consider in the coming weeks that could ultimately add to your long-term bottom line as well as give you peace of mind.

Emergency Fund

If you have not already done so, give yourself and your family the gift of an emergency fund.  Our recommendation is that you have six months worth of expenses saved and easily accessible in a low risk and liquid type of an account such as a money market account.  You can reduce the size of your emergency fund by any guaranteed income you receive, such as paychecks, pension, Social Security, or Municipal Bond income.

Old-fashioned stockbrokers called it May Day:  May 1st, 1975.  That’s the day the Securities and Exchange Commission allowed brokers to deviate from the old fixed-commission schedule.  Prior to that date, all brokerage firms charged the same price for processing a stock trade.  And with pricing under the control of a cartel (the New York Stock Exchange), of course it wasn’t exactly cheap!  On May Day, enterprising Charles Schwab began discounting commissions.  Now, 44 years later, commissions have fallen all the way to zero.  I’m sure that would have been utterly unimaginable in 1975, but then again so would much of what we take for granted today.

I looked back at our own trading records to remind me how far we’ve come.  When I joined Provident in the early 1990s, trading costs were 25-75 cents a share, subject to a minimum commission.  For example, trading 700 shares cost $196 or 28 cents a share.  Most of our trades were executed by a large brokerage firm that provided research and other information, mostly of dubious value.  Looking to do better for our clients, we took an educated gamble and moved to a new breed of execution-only institutional brokers that didn’t bundle research services with high-cost trading.  Within just a few years, client commissions had fallen to a nickel a share! Trading 700 shares cost $35, down 80% in just a few years, and we thought we were in heaven.

Our neighbors recently engaged in a longtime summer tradition, the lemonade stand!  It was well done with homemade signs and cheerful service.  The price these girls asked for a cup of lemonade was in line with the current lemonade market, though when I think back to my youth a quick calculation would indicate we should all be glad the Fed uses the PCE Index instead of the Neighborhood Lemonade Index in gauging inflation.  Otherwise, we might be looking for a return of the hawkish Paul Volcker as Fed Chairman.

 The stand reminded me of my own occasional foray into the business as a child.  I would guess my experience mirrored your typical lemonade stand—tremendous excitement when you get a customer, but painfully long intervals between transactions.  Usually after a couple of hours I’d lose patience and close up shop.  One day I had an idea to drive more traffic.  I would sell a better-known product at a heavily discounted price!  There was a fresh case of Coca-Cola in the garage that my parents had recently purchased, so the timing could not have been better.  With a superior branded, packaged product, I set up shop and got to work selling cans of Coca-Cola below cost.  This actually worked great for me—it was pure profit.  However, it was obviously not so great for my parents, who served as my unwitting venture backers supporting a highly flawed business model.

In my March Viewpoint I asked readers to please share ideas and anecdotes about how money has affected their families.  My goal is to turn that feedback into a short book.  I think I have reasonable ambitions for the project.  This won’t be the next Harry Potter, and probably not even another The Millionaire Next Door, but I think there could be a gap in the market for a financial wisdom book specifically targeting an affluent audience.  With your help my project is moving forward, and this month I’m circling back with a progress report.

 I received some terrific feedback.  Thank you.  It’s not too late to contribute, by the way!  Just under 20 responses came by phone and email, slightly beating my minimum goal of 15.  Of course, quality matters more than quantity, and many responses were extremely—pardon the pun—rich in insight.  If I count the most thoughtful responses double or triple, then the volume of feedback looks a lot more impressive.  I still owe a few of you follow-up emails or phone calls, which should contribute more to my volume of notes as well.

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.