What a Week
Without question, this week has been a difficult one for our nation. We were founded to be “one nation, under god, with liberty and justice for all”. Since our nation’s founding, there has been tremendous progress towards this belief. That said, the events that unfolded this week signal deep challenges facing our nation and that difficult conversation and progress still need to be made.
A Market Rally
When the stock market rallies this quickly to a new high, the odds of a second correction go up. Remember the market is not the economy. Without strong fundamentals, positive jobs results announced on Friday we still find ourselves at 35.5 million unemployed. The market moves on better or worse news not, good or bad, most firms were expecting negative numbers so positive numbers were a surprise. Even if businesses are opening back up that doesn’t mean they will all survive. And with declining/flat growth we still believe we are not out of the woods yet on unemployment. You can read more on this in our blog post - The Second Wave of Unemployment. We feel the longer the economy stays at these historical low numbers the higher probability we are in a declining growth and rising inflation environment. The picture above is May’s US Manufacturing, the redline is the implied expansion or contraction crossover of manufacturing. Essentially a number above 50 means we have growth. At the end of May we are at 43, even though May’s number is better than April we are still not in growth territory as a whole. In fact, from a historical context we are still at 50-year monthly lows. This is also true with unemployment, even with a great jobs report in context we are still at historical lows in terms of employment (i.e. unemployment is at an all-time high). Even if this trend continues ‘June better than May better than April’ we are still facing declining growth maybe just not as fast as we once were. We also need to make some considerations for inflation, due to the massive balance sheet the Fed has taken on.
We still remain defensive and within our tolerance bands, however if the market continues to rebound, I can see our models indicate another rebalance for our core holdings. At that time, we will also look to make a tactical shift that would include moving towards investments that trend with slow increases in inflation (5+ years) and flat growth.
CARES ACT 6-year rule
With so many tax changes in the last 3 years I wanted to clarify IRA beneficiary designations. As you can see from the chart above there are 3 different type of designations. The key designations between the three are the timeline for withdrawals. Eligible designated beneficiary, think of a spouse, they are the only ones who can still stretch IRA withdrawals. This means they use and IRS RMD table to determine their annual withdrawal. The next type is a designated beneficiary, think of these like adult children, they only have 10 years (no longer able to stretch an IRA). The last type is non-designated beneficiaries, think of holding assets in your estate, the withdrawal time horizon is normally 5 years. With the CARES Act this has changed to 6 years. Which means all assets in an IRA or a pension plan that are subject to the 5-year rule now have by Dec 31st of the 6th year following the owner’s death.
It does not appear that the CARES Act will extend the six-year rule for any IRA owner or plan participant where the owner/plan participant died in 2020. With everything in tax law this may change and please consult a tax advisor for any tax advice. But this will definitely affect people where the owner/participant's death occurred between January 1, 2015, and December 31, 2019.
When does the 5-year rule apply? Most commonly it happens in 3 cases: when there is no listed beneficiaries on IRA, or the beneficiary is either a Charities or a non-see-through Trust. Specifically, a non-see-trust are used for those who want to exercise control of distributions, sometimes used for individuals that have special needs. If you are a receiving an IRA by means of a non-designated beneficiary then there is a planning opportunity here. Even though you may make distributions of IRA assets each year so that their marginal tax rate will be lower, it may provide little to no benefit to those in the highest income tax bracket. However, if there are changes in income over that 6-year period proper planning and timing of withdrawals can save thousands of dollars in taxes since asset do no need to be distributed evenly.
It is important to review your beneficiary designations as tax laws change. If you are working with an advisor that has not reviewed your beneficiary designation on IRAs and Roth IRAs, due to tax changes, let us do a complementary review for you. Feel free to connect with us by emailing us or filling out our contact form. If you would like to subscribe to the newsletter for weekly updates from the team at Client First Capital.
