Monthly Archives: August 2017

Required Minimum Distributions from Inherited IRAs

If you inherit an IRA and are not a spouse of the deceased you have two choices:

  1. You can cash it in and pay income taxes on the proceeds, or…
  2. You can defer the taxes on it and allow it to grow tax deferred.

An Inherited IRA (also known as a Beneficiary IRA) differs from a regular IRA and the two should not be combined.  A key difference between the two types of IRAs is how Required Minimum Distributions (RMDs) are calculated. Specifically, a different IRS table is used (the Single Life Table) to calculate the first year’s RMD from an Inherited IRA, and this initial calculation is used for the calculation of RMDs in subsequent years.

A second difference is that you are not required to take RMD distributions from a regular IRA until you turn 70 ½.  However, you are required to take an RMD from an Inherited IRA by the end of the year after you receive it.  This is true no matter the age of the deceased or the beneficiary’s age.

The amount of the RMD is based on value of the IRA at the end of the previous year and the age of the beneficiary.  The rules can get quite complicated and it’s usually a good idea to consult a professional to insure that you don’t run afoul of the IRS.  Penalties for not taking the RMD can be as high as 50%.

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Good News on the Economic Front

Our favorite economist, Brian Wesbury of First Trust has a new note out that we wanted to share.

While the Sunday morning talk shows discuss the number of Civil War monuments that can dance on the head of a pin…and a rare Eclipse grabs focus…investors might be shocked at how the economy has accelerated.

Although we still have more than a month left in the third quarter, and many more pieces of data to come, as of August 16th the Atlanta Fed’s “GDP Now” model, which tracks and estimates real GDP growth, says the economy is expanding at a 3.8% annual rate in Q3.  If correct, that would be the fastest pace for any quarter since 2014.

We usually take forecasts this early with a grain of salt.  After all, a lot can happen over the remainder of the quarter.  And, on some prior occasions, the Atlanta Fed has projected rapid growth for a quarter mid-way through, only to ratchet back the forecast by quarter-end to a more pedestrian Plow Horse growth rate near 2%.  But, in this particular case, we think the pick-up is real.  In fact, our own internal forecast suggests the exact same growth rate of 3.8%.

One thing more pessimistic analysts are focusing on is that “inventories” are adding about 1% to the third quarter growth rate.  It looks like businesses are stocking shelves at a more normal pace after the lull in the first half of the year.  Excluding this inventory boost, First Trust models have real GDP growing at a 2.4% annual rate in Q3, while the Atlanta Fed model has it at 2.8%.

It’s hard to remember that the original report for Q1 real GDP was less than 1% growth.  That report worried many investors, and doom and gloom stories abounded.  But the foundation for continued economic growth remains in place.

It’s true that the US is unlikely to see tax cuts or real tax reform (or both!) anytime this year.  And this will make sustaining GDP growth at a 3.8% rate very difficult.  But we expect favorable changes in tax policy by early next year.  All that said, the best news is any threat of growth-harming tax hikes remains virtually nil.

Meanwhile, the one area of clear improvement in economic policy under President Trump has been regarding regulation.  The issuance of new rules that slow growth has basically stopped, while harmful old rules are getting rolled back or being reviewed for reform.  This alone can help push growth up by ¼ to ½ percentage point on an annual basis.

In addition, monetary policy remains very loose.  Short-term interest rates are still well below “normal” and there are over $2 trillion in excess reserves in the banking system.  We still expect another rate hike this year, and it seems clear that the Fed will begin slowly reducing the size of its bloated balance sheet.  Assuming the Fed starts balance sheet normalization on October 1st, their $4.4 trillion-dollar balance sheet would shrink by a measly 0.7% by year-end.  This takes the Fed from running a super-easy monetary policy to a very, very easy monetary policy.  In other words, any threat from tight money is remote.

Trade protectionism was the biggest threat to the economy as the new Trump Administration took office, but so far, there’s been a great deal more rhetoric than action on this front.  We remain confident that President Trump realizes a true lurch into protectionist policies would risk a drop in the stock market and would make it harder to meet his goal of faster economic growth.  Protectionist promises are much easier to break (or just ignore), when the unemployment rate is moving toward 4%.  Instead, expect the president to pivot toward trying to get better enforcement of intellectual property rights from China and an open market in oil and gas exports.

We constantly warn investors that one quarter, or one month, of economic data is meaningless.  So far, the Plow Horse has not morphed into a thoroughbred.  However, good news tends to lead to more good news and momentum is building.

Better economic growth means better profit growth and better profit growth will help push stocks higher.  Our 2017 end-of-year forecast of 2,700 for the S&P 500 and 23,500 for the Dow Jones Industrial Average remains in place.  Risks to growth remain low, and the chance of an acceleration remains positive as third quarter data is suggesting.

 

 

 

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Once you sell out, when do you get back in?

I recently heard about a 62-year-old who was scared out of the market following the dot.com crash in 2000.  For the last 17 years his money has been in cash and CDs, earning a fraction of one percent.  Now, with the market reaching record highs, he wants to know if this is the right time to get back in.  Should he invest now or is it too late?

Here is what one advisor told him:

My first piece of advice to you is to fundamentally think about investing differently. Right now, it appears to me that you think of investing in terms of what you experience over a short period of time, say a few years. But investing is not about what returns we can generate in one, three, or even 10 years. It’s about what results we generate over 20+ years. What happens to your money within that 20-year period is sometimes exalting and sometimes downright scary. But frankly, that’s what investing is.

Real investing is about the long term, anything else is speculating.   If we constantly try to buy when the market is going up and going to cash when it goes down we playing a loser’s game.  It’s the classic mistake that people make.  It’s the reason that the average investor in a mutual fund does not get the same return as the fund does.   It leads to buying high and selling low.  No one can time the market consistently.  The only way to win is to stay the course.

But staying the course is psychologically difficult.  Emotions take over when we see our investments decline in value.  To avoid having our emotions control our actions we need a well-thought-out plan.   Knowing from the start that we can’t predict the short-term future, we need to know how much risk we are willing to take and stick to it.  Amateur investors generally lack the tools to do this properly.  This is where the real value is in working with a professional investment manager.

The most successful investors, in my view, are the ones who determine to establish a long-term plan and stick to it, through good times and bad. That means enduring down cycles like the dot com bust and the 2008 financial crisis, where you can sometimes see your portfolio decline.  But, it also means being invested during the recoveries, which have occurred in every instance! It means participating in the over 250%+ gains the S&P 500 has experience since the end of the financial crisis in March 2009.  

The answer to the question raised by the person who has been in cash since 2000 is to meet with a Registered Investment Advisor (RIA).  This is a fiduciary who is obligated to will evaluate his situation, his needs, his goals and his risk tolerance.  And RIA is someone who can prepare a financial plan that the client can agree to; one that he can follow into retirement and beyond.  By taking this step the investor will remove his emotions, fears and gut instincts from interfering with his financial future.

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Beware the Quirks of the TSP in retirement

The TSP (Thrift Savings Plan) is a retirement savings and investment plan for Federal employees. It offers the kind of retirement plan that private corporations offer with 401(k) plans.

Here is a little information about he investment options in the TSP.

The TSP funds are not the typical mutual fund even though the C, F, I, and S index funds are similar to mutual fund offerings.

The C Fund is designed to match the performance of the S&P 500

The F Fund’s investment objective is to match the performance of the Barclays Capital U.S. Aggregate Bond Index, a broad index representing the U.S. bond market.

The I Fund’s investment objective is to match the performance of the Morgan Stanley Capital International EAFE (Europe, Australasia, Far East) Index.

The Small Cap S Fund’s objective is to match the performance of the Dow Jones U.S. Completion Total Stock Market Index, a broad market index made up of stocks of U.S. companies not included in the S&P 500 Index.

The G Fund is invested in nonmarketable U.S. Treasury securities that are guaranteed by the U.S. Government and the G Fund will not lose money.

One advantage of the TSP is that the expenses of the funds are very low.  However, if you plan to keep your money in the TSP after you retire you need to understand your options because there are traps for the unwary.

The irrevocable annuity option.  

This option provides you with a monthly income.  You can choose an income for yourself or a beneficiary – such as your spouse – that lasts your lifetime or the lifetime of the beneficiary.  The payments stop at death.  Once your annuity starts, you cannot change your mind.

Limited withdrawal options. 

You can’t take money out of your TSP whenever you want.  When it comes to taking money out you have two options.

  1. One time only partial withdrawal. You have a one-time chance to take a specific dollar amount from your account before taking a full withdrawal.
  2. Full withdrawal.   You can choose between a combination of lump-sum, monthly payments or a Met-Life annuity.

Limited Monthly Payment Changes

If you take monthly payments from your TSP as part of your full withdrawal option you can change the amount you receive once a year, during the “annual change period” but it takes effect the next calendar year.  If you choose this option, make sure that you know how much you will need for the coming year.

Proportionate distribution of funds

When you take money out of your TSP you have no choice over which fund is liquidated to meet your income needs.  It comes out in proportion to which your money is invested.  This means you can’t manage your TSP and decide which of the funds you will access to get your distribution.

If you want to give yourself greater flexibility once you retire you have the option of rolling the TSP assets into a rollover IRA without incurring any income tax.

 

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What Makes Women’s Planning Needs Different?

While both men and women face challenges when it comes to planning for retirement, women often face greater obstacles.

Women, on average, live longer than men.  However, women’s average earnings are lower than men, according to a recent article in “Investment News,”  in part because of time taken off to raise children.  What this means is that on average, women tend to receive 42% less retirement income from Social Security and savings than men.

The combination of longer lives and lower expected retirement income means that women have a greater need for creative financial advice and planning.  The problem is finding the right advisor, one who understands the special needs and challenges women face.

A majority of women who participated in a recent study said they prefer a financial advisor who coordinates services with their other service professionals, such as accountants and attorneys.  They want explanations and guidance on employee benefits and social security claiming strategies.  They want advisors who take time to educate them on their options and why certain ones make more sense.  Yet many advisors do not offer these services.

Men tend to focus on investment returns and talk about beating an index.  Women tend to focus more on quality of life issues and experiences, on children and grandchildren, on meeting their goals without taking undue risk.

If your financial advisor doesn’t understand you and what’s important to you, it’s time you look for someone who does.

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