We are not tax advisors, but over the past few months a clear trend has developed during our conversations with clients and income tax professionals – The new higher standard deductions have made charitable contributions less beneficial and often non-deductible.
In actuality, it’s a combination of things, the higher standard deduction, limits placed on the amount of state and property taxes that are deductible as an itemized deduction, and so forth. Although everyone’s specific financial and tax situation is different, there is a common theme that appears beneficial to most.
Historically, clients would take their annual required minimum distribution (RMD) from their IRAs, SEP’s, SIMPLEs or 401-k plans. This RMD is the amount the IRS requires you to withdraw each year from your retirement plan(s) once you reach age 70 ½. The amount of the distribution is generally included as ordinary income and is taxable in most situations. In the past, most clients would report the income and then they would itemize their taxes to include charitable contributions and as long as their total itemized deductions exceeded the standard deduction, they received a financial benefit from making the charitable contributions.
In 2018, however, the new tax law essentially doubled the standard deduction level. Meaning if you no longer have expenses that qualify as itemized deductions on your return, then essentially you receive no financial benefit from making the charitable contributions. To illustrate: Assume John & Mary are 71 years old and normally itemize for tax purposes. In 2017 between state and property taxes, charitable deductions, mortgage interest and any other qualifying expenses they had $20,000 in itemized deductions. In this case they benefitted from their charitable contributions. In 2018, the $20,000 would be below the standard deduction so they would benefit more taking the standard deduction and by not itemizing. In other words, the money they gave to charities in 2018 provided them with no benefit tax-wise. They would have received the same level of deductions had they not given any money to charities.
Most of us like to give. We want to help out worthy causes and the deductions for income tax purposes always made it that much more appealing. So, what is a person to do?
As I stated in the beginning, there is a solution that is increasingly beneficial. Sending your IRA distributions directly to a charity allows you to reduce your taxable income by the amount donated to the charity and doesn’t impact your taxable deductions because you still qualify for the higher standard deduction level.
For example, if your RMD is $50,000 for 2019. If you take it as a normal distribution you will report $50,000 as income; however, if your RMD is $50,000 and you give $20,000 of the $50,000 directly to charities then you will only report $30,000 as income. If you don’t itemize you still get the same standard deduction level you would if your income was the $50,000. Even if you still itemize, taking the reduction from your income is usually much more beneficial than taking it as an itemized expense.
Consult your tax advisor to see if this strategy can benefit you as much as it has benefitted several other clients of ours. If you are not yet taking distributions from your IRA, but know others that are (parents, family or friends) encourage them to also get tax advice in regard to this scenario.
If you have any questions or would like to talk about your specific situation, please contact our office.
We need to talk about Nevada, where leading broker-dealers including Morgan Stanley, Edward Jones, Charles Schwab, Wells Fargo and TD Ameritrade have sent letters to the state threatening to stop doing business or reduce investment services for investors if a fiduciary standard is put into place. They argue it is too expensive and the burden of compliance to meet a fiduciary duty would have a negative impact on investors, particularly low-and-middle income investors.
Wait, what? If the state of Nevada implements a rule which essentially states brokers and advisors must put the best interest of clients above all else, these firms are taking their ball and going home? That, is unbelievable. Are they going to leave New Jersey and Maryland as well since both states have put forth fiduciary proposals? Before we rush to judgement, let’s be fair and look at what Nevada is proposing, maybe we are missing something.
Well, that seems pretty straightforward and reasonable – that somebody performing any of the above actions or holding themselves out to be a financial advisor will be held to a fiduciary standard of putting the best interest of the client first and foremost. Morgan Stanley had this to say about it:
Absent substantial changes to the proposal, Morgan Stanley will be unable to provide brokerage services to residents of the state of Nevada.
That seems a bit extreme, does it not? Regardless, let’s dig deeper. Maybe the backlash stems from the definition of what actually constitutes investment advice per Nevada’s proposal.
I don’t see the debate here either. I guess if I was forced to play devil’s advocate, I could argue that providing security analyses or reports needs more clarity or redefined in order to trigger a fiduciary relationship. Otherwise, the framework presented here is spot-on. Think about it this way, re-read the above bullet points but this time in the context of, “An advisor does not have to put their client’s best interest above all else when they provide …” That definitely feels uncomfortable and misaligned.
There must be more to the story that has these firms and lobbyists all twisted up and bothered. Let’s keep going and look at the exemptions to the rule and another hot topic which is how a dually registered representative is treated.
To summarize, Nevada has carved out space for transactional services by limiting the duration of the fiduciary responsibility of the broker or sales rep. The proposed regulations go even further in providing exemptions. For example, there is no fiduciary duty applied to brokers who execute unsolicited transactions for clients whose assets they are not managing. Additionally, the standard does not apply to clearing firms or to those who are executing orders from a registered investment advisor. Still there is more:
But yet it’s still not enough for the broker-dealers. Puzzling, right? What exactly is behind the threat to leave Nevada simply because they want to implement regulations that require brokers, sales reps, advisors, etc. to put a client’s best interest above their own? There appears to be ample exemptions and room for everything from selling proprietary products to receiving commissions. Enter the dually registered representative.
Now, we might be onto something serious. Why? Because what this says is an advisor can’t switch hats anymore. What most people do not understand is their advisor can be dually registered. In other words, they can be a broker (who is not a fiduciary nor required to act in such a capacity) and an investment advisor (who is a fiduciary and must act at all times as such duty requires). Therefore, under current regulation, an advisor can act as one or the other or even switch hats within a relationship based on a variety of factors.
Nevada is saying no more. If you’re dually registered, you’ll be held to the fiduciary duty at all times. This will impact, if not fundamentally change, the business model of these firms, their brokers and sales representatives. Whereas before, they could technically work with the client however it best suits their business, now there would be a burden of proof to act in the client’s best interest. I presume this is inconvenient and less profitable and these firms simply don’t want to do business this way.
I do not buy for one second the argument that holding an advisor to a fiduciary duty excludes low-and-middle income investors. What excludes low-and-middle income investors are the firms and advisors who do not want to work with them unless they can transact business on a commission basis out from under a fiduciary duty. Why? Because it is more lucrative and there’s less responsibility to the client.
To be clear, there is nothing inherently wrong with commissions or the business of brokering transactions in the marketplace. What is outrageous is presenting the argument these firms are fighting for what’s in the best interest of investors, regardless of account size, by NOT implementing a fiduciary standard – which by the way mandates the client’s best interest remain first and foremost above all else. Think about that for a second. It makes zero sense.
AIMA, Inc. is proof a fiduciary model works
Ables, Iannone, Moore & Associates, Inc. is a fee-only, SEC registered investment advisory firm located in Savannah, GA. We provide asset-management to clients in over 20 U.S. states, Europe, Asia and South Africa. We are fiduciaries and do not impose minimums on our clients because we believe the size of the account should not dictate the quality of service or the depth of the relationship.
As an independent advisory firm, we get to know our clients and put ourselves in their shoes. We have a fixed and transparent fee structure that is easy to understand. Our investment process combines independent research, information from analysts and think tanks and we listen to the companies themselves. Next, we apply our beliefs and expertise within the markets and ultimately invest for our clients as if we were in their specific situation. Our business model, growth and support from our clients proves a fiduciary model works if the advisory firm wants it too.
This time of the year brings a myriad of questions surrounding retirement plans for the self-employed and the business owner. Whether you are a sole proprietor, small business owner, medical practice or larger corporation, retirement plans are essential tools for tax and retirement savings. We understand every business is different and welcome the opportunity to discuss your needs and help design a plan that makes sense. If you currently have a plan in place and would like to review it, we would be more than happy to look at it with you. In the end, there are few tools more powerful than retirement plans for the business owner – they can create annual tax savings, provide tax deferred growth to fund retirement and if applicable, aide in the recruiting and retention of employees.
The highly debated midterm elections have come and gone. After the dust settled, Congress is split as the Democrats secured enough seats to flip the majority and retake the House while the Republicans added seats to their majority in the Senate. Let’s take a look under the hood, courtesy of our friends at CFRA Research, and see what history tells us about post-elections, political gridlock and market returns.
This was the 19th midterm election since 1946.
Did you know?
History is only a guide, not a guarantee, but what stands out most to us is the 100% advance rate in the 365 days after the election in comparison to only 2/3rds of the time in the short timeframe up to year’s end. Clearly, investors become more and more bullish once the midterm elections pass. A large part of that bullishness can be credited to the fact that the uncertainty leading up to the election is now minimized, if not gone entirely. Will it happen again after this midterm election, in this environment? That is the million-dollar question, as the saying goes. The actual legislative environment does matter so let’s dig even deeper and see what history tells us about political gridlock.
The Unified Government scenario is by far the best and it makes clear sense because there is little need for compromise to get legislation and policies approved. The 80% frequency of advance is the telling number in that scenario. Under a Unified Congress, there is still room to approve stimulus and policy, albeit with a bit of compromise. The least favorable set-up is a Split Congress because both sides typically dig their heels in and all but refuse to compromise. We believe volatility and returns will be influenced by how Congress decides to govern. The President will likely focus in on key areas where his executive powers can be maximized such as tariffs. Other legislative items such as immigration, further tax overhauls and healthcare reform will likely face stiff headwinds.
It is important to remember that markets are a reflection of several variables, domestic politics being just one of those inputs. We believe a couple of the challenges facing this market are very real but controllable, namely tariffs and Fed monetary policy. A healthy skepticism is welcomed as we progress forward under a split Congress, in this global economic environment at this stage of the corporate earnings cycle. However, on balance we believe history has written a strong case for continued market gains post midterms. We take a wide-angle view and understand this is not the first-time investors have differed on politics or faced trade wars, inflation or rising interest rates. The short-term view isn’t always the clearest one so we must continue to invest with the long-term in mind.
One important note to distinguish us at Ables, Iannone, Moore & Associates from other firms is we use individual stocks and bonds. This helps us manage portfolios with tremendous flexibility, control and transparency. It also allows us to reduce costs. We believe this makes it easier to align our management to the goals of the client vs a one size fits all feel that is associated with model portfolios and financial products.
The other week I wrote a post about some of the opportunities we are seeing in the fixed income space in current market conditions. I won’t rehash that discussion but it largely centered on individual bond structures we like in a rising rate environment.
What you may have noticed is it did not include bond mutual funds or ETF’s for that matter. Here are 3 reasons why:
Let’s recap. There is no guarantee made as to the return of principal. It’s hard to nail down the cash flow that will be generated from owning shares of the fund. And they are expensive. So why use them? First and foremost they are easy to own. It makes getting diversified exposure to fixed income really simple. Also, there are times in which no alternative exists such as inside a company 401k or other retirement plan. On the more nefarious side, advisors can be incentivited for selling or using the funds in client portfolios. We see this quite a bit with the big name places – looking through a statement and seeing the firm’s own funds conveniently being used. I digress.
Our goal isn’t to rail against bond mutual funds or ETFs and it’s not to suggest you are going to investment hell for using them. Rather, it is to highlight the alternative of using individual bonds to customize specific fixed income solutions. Instead of pooling that money with thousands of other investors under one goal of a fund manager, we find it is superior using individual bonds to manage various risks such as duration, reinvestment, interest rate, principal and credit for our clients. It provides flexibility and clarity on what you own, how much cash flow will be generated and an end date for when we can expect a return of principal.
Ables, Iannone, Moore & Associates, Inc. is a fee-only, SEC registered investment advisory firm providing asset-management to clients in over 20 U.S. states, Europe, Asia and South Africa. We have over 50 years of combined experience in the financial services industry.
This is literally a question we get asked all the time, regardless of the market environment. It is understandable – not all portfolios are created equal regarding entry price and allocation – and people come to us at differing times with new money or cash positions asking what is the best route to take? How can we help get their money working harder? Of course the answer to those questions are very specific to each client but we thought it would be helpful to show an example of an opportunty we are seeing right now in the markets. Something you could possibly adapt to your own personal situation.
Let’s start in the stock market, fresh off its all-time highs. We do see some attractive names, but in general stocks seem fairly priced. In other words there aren’t a lot of great deals to be had. Some? Yes, but not a lot. It rarely does us any good to chase prices. Instead, taking some profits where appropriate, waiting for better pricing on entry and slowly building positions has been our recent approach with equities. That said, we also aren’t feeling any dramatic recession is upon us. How about elevated volatility? Sure, but nothing more than the healthy garden variety type.
Now let’s look at the fixed income side of things. We know bond yields are gradually rising. Remember, when interest rates rise, the price on existing bonds fall. With the FED continuing to increase short-term rates, we know market forces will also gradually increase the yield on the bonds available. This is largely due to supply and demand. Foreign yields are a drag on this at the moment, but eventually longer-term bond yields should rise back toward normal levels. This can cause a decline in the value of your portfolio of existing bonds and leave you with a multi-year underperforming asset. Many investors see this backdrop as a catch-22. But there are creative ways to invest in this environment and we have been successfully using a hybrid approach to boost yields during this time.
Specifically, we see a ton of opportunity in short-term corporate bonds linked to underlying stocks. Because of the structure of the bond this has produced attractive yields with short maturities. Another area is in longer-term bonds that have adjustable rates tied to economic measures such as the consumer price index (inflation) or the difference between say the 30-year treasury rate and the 2-year rate. Take the 30/2 example for instance, since there is virtually no difference currently in the spread, these bonds are being sold at a deep discount. However, if you believe as we do that the yield curve will eventually return to a more normalized level, you could see bonds such as these appreciate in price and produce rising coupons simultaneously. That is a good thing.
Here’s the point of all this. Instead of sitting around fearful of the next bear or trying to perfectly time the markets, there are ways to take advantage of opportunities as they are presented. Currently, it happens to be with some creativity and a hybrid approach to fixed income while maintaining discipline within the equity market.
Ables, Iannone, Moore & Associates, Inc. is a fee-only, SEC registered investment advisory firm providing asset-management to clients in over 20 U.S. states, Europe, Asia and South Africa. We have over 50 years of combined experience in the financial services industry.
Thank you to my friend Randy Gipson who sent me this article from Forbes, Inc. I am reposting this as I think it provides excellent insight into the real costs of using funds versus utilizing indivual stocks and bonds and it illustrates some of the many reasons we only use individual stocks and bonds in managing our client's investments.
In over 25 years of business, our firm has never had an initial meeting with an investor who completely understood the total costs of the mutual funds they owned. The following article seeks to simplify the many complexities of mutual fund expenses so investors are able to discover the true costs associated with mutual fund ownership. To simplify this topic, six different costs will be evaluated: expense ratio, transaction costs (brokerage commissions, market impact cost, and spread cost), tax costs, cash drag, soft dollar cost and advisory fees.
The expense ratio is frequently the only cost that many investors believe they pay when owning a mutual fund. The expense ratio is frequently used to pay marketing costs, distribution costs and management fees. This ongoing cost can be identified by reading a mutual fund’s prospectus. The average U.S. Stock fund now costs .90% per year according to a recent Morningstar article (1).
A study by Edelen, Evans and Kadlec found U.S. Stock Mutual Funds average 1.44% in transaction costs per year (2). These costs can be difficult to determine, are not found in most prospectuses, and are not included in the aforementioned expense ratio. A group of cost conscious investors called the Bogleheads breaks down transaction costs into three categories: brokerage commissions, market impact, and spread cost (3).
1. The first type of transaction cost is brokerage commissions. Brokerage commissions result from mutual fund managers buying and selling stocks for mutual fund investors inside of the fund company’s brokerage account(s). Discovering the additional expenses due to turnover can be a difficult endeavor. This task can be accomplished by making estimates based on information found in the Statement of Additional Information, a document mutual fund companies must make available upon request, but don’t generally distribute to investors.
2. The second transaction cost even more difficult to estimate is market impact cost. The Bogleheads define market impact cost this way: “A mutual fund making a large transaction in a stock will likely move the stock price before the order is completely filled.” This negatively affects mutual fund owners in three distinct ways. First, individuals receive less favorable prices on certain stocks being bought and sold. This occurs when an investor’s mutual fund manager is buying or selling large quantities of stock that drives the price artificially higher or lower. Second, a fund manager may alter its investment management strategy to avoid excessive market impact costs. This can happen if a manager chooses to enter and exit stock positions over long time horizons in an effort to mitigate sudden short term movements in the securities it is trying to sell or acquire. Last, a mutual fund manager may be forced to include less favorable stocks in its portfolios to alleviate the market impact pressure on its favorite stocks. Market impact cost can be a lose-lose situation for mutual fund investors because they may get unfair pricing on both the buy and sell side of stock transactions in addition to having their mutual fund managers compromising their stock picking prowess to avoid excessive costs.
3. The final transaction cost is called spread cost. This cost also occurs when a mutual fund manager buys and sells stocks for mutual fund owners. Spread cost reflects the difference between the best quoted ask price and the best quoted bid price. This cost is also difficult to quantify. Generally, it is more excessive when a mutual fund is trading international or smaller, less liquid stocks (3).
As illustrated below, transaction costs can add substantially to the overall expense of an investor’s mutual fund. In addition to being substantial, these costs are nearly impossible to accurately quantify.
Many investors pay more than their fair share in taxes when owning mutual funds. This problem is most transparent when mutual funds are owned outside of an IRA, Roth IRA, 401(k), or other tax-deferred accounts. An investor who buys into a mutual fund that is holding stocks that have appreciated prior to the purchase of the fund runs the risk of paying for these stocks’ capital gains taxes. Essentially, even if the investor did not benefit from the stocks’ gains, this investor will share proportionately in taxes due from the sale of these appreciated stocks when the mutual fund manager makes a change. Ultimately, one can end up paying taxes on investments that other investors profited from. Before purchasing an actively managed mutual fund in a taxable account, an investor should consider contacting the company to determine the level of embedded gains within the mutual fund. According to Morningstar, the average tax cost ratio for stock funds is 1% to 1.2% per year (4).
Another cost of owning a mutual fund is cash drag. Cash is frequently held by mutual fund managers to maintain liquidity for potential transactions and potential redemptions by mutual fund owners. This may stifle the performance of a mutual fund if stocks increase in value greater than the cash held. According to a study by William O’Rielly, CFA, and Michael Preisano, CFA, the average cost from cash drag on large cap stock mutual funds over a 10-year time horizon was .83% per year (5). This cost results from investors paying the mutual fund’s expense ratio on 100% of the money invested despite the fact that not all of the assets are invested into stocks or other securities. Someone who holds cash in a bank savings or money market account on an individual basis generally does not have to pay these extra costs. Essentially, buy and hold investors are subsidizing other investors’ liquidity needs. It should be noted that cash held within a mutual fund could be beneficial during a time when stocks do poorly and incrementally more expensive when stocks perform well relative to cash.
Soft Dollar Cost
One of the most difficult mutual fund expenses to estimate is called soft dollar cost. This cost comes into play when mutual fund managers are buying and selling stocks within the mutual fund’s brokerage account(s). Frequently, mutual fund managers may direct the money being managed to brokerage companies providing them with research and/or other services, even if the brokerage companies are not providing the most cost efficient brokerage commissions involved with buying and selling stocks. Essentially, this is a quid pro quo arrangement. The mutual fund manager gets special services and/or research, and the brokerage company gets the brokerage business at a premium rate. This effectively keeps this cost out of the public’s eye, giving a fund the artificial appearance of lower than actual expenses. A research study by Stephen M. Horan suggested that U.S. soft dollar brokerage commissions may total $1 billion annually, or up to 40% of all equity trading costs (6).
The final cost is only relevant to individuals working with fee-based financial and/or investment advisors who select mutual funds for their clients. Many fee-based advisors will manage an investor’s portfolio for an annual fee commonly ranging from .25% to 2.50% of the portfolio’s balance. This fee is required to be disclosed on investors’ statements, and is charged in addition to the other mutual fund costs discussed.
The following summarizes the average quantifiable costs described. Advisor and soft dollar costs are excluded due to the large range in advisory fees and the difficulty of quantifying soft dollar costs. When working with a financial advisor, it is important to add the advisory fee to the mutual fund costs listed below for an accurate depiction of total potential costs.
|Expense Ratio .90%
||Expense Ratio .90%
|Transaction Costs 1.44%
||Transaction Costs 1.44%
|Cash Drag .83%
||Cash Drag .83%
||Tax Cost 1.00%
|Total Costs 3.17%
||Total Costs 4.17%
A retirement nest egg may make you feel like you've locked down your financial future, but don't get too comfortable. Getting hit with a liability lawsuit in your retirement years could turn your life upside down.
While your insurance may cover some damages or legal fees, an umbrella insurance plan goes further. It protects you and your assets if you are held liable for a claim exceeding the coverage of your other insurance policies. Without such coverage, your assets could be in trouble.
Say, for example, you're five years into retirement and you get into an auto accident. Your car is just a little banged up, but the other driver and his passengers are seriously injured. You're hit with a claim of $1.5 million, but your liability auto insurance only covers $100,000.
If you don't have an umbrella policy extending your coverage, you'll be responsible for $1.4 million. If you don't have that kind of cash on hand, your assets will be seized.
What is an umbrella policy?
Umbrella insurance is liability coverage that goes above and beyond what your homeowners, renters and auto insurance policies provide. Umbrella coverage has higher limits with a broader range of coverage, including claims involving bodily injury, property damage and issues such as libel, slander and defamation of character.
If you're sued or found liable for damages, umbrella policies will pay not only the monetary damage costs, but also attorney fees and other court costs. Having such coverage can prevent another party from going after your assets if damages and legal costs exceed the limits of your regular policy.
It's important to note that employee retirement accounts and IRAs are usually protected under federal laws even if you don't have umbrella coverage, so your retirement account will likely remain safe even if a legal case were to bankrupt you. But as for the rest of your assets? Not so much.
How much should I get?
Typical umbrella policies start at $1 million in coverage and are sold in million-dollar coverage increments. You'll usually need to carry minimum underlying liability coverage on your homeowners or renters policy before you can buy umbrella insurance.
In general, you'll want enough coverage to at least cover your net worth, says Fernandez. Calculate the value of your retirement and other assets you have vs. your debt to determine your net worth. For most, $1 million in liability coverage will be enough; if your net worth is higher, consider bumping up your coverage accordingly.
Before choosing a plan, it's a good idea to sit down with your property and casualty agency to make sure you will be adequately insured in case of a liability lawsuit.
Generally, this type of insurance is relatively inexpensive and I strongly recommend it. If you don’t have a property and casualty agent that you are comfortable with please don’t hesitate to ask us. We can refer you to folks in that arena that we feel very confident will provide you with unbiased advice.
Back in March, the IRS announced that an individual can do only one rollover from one IRA to another in 365-day period, noting that the rule wouldn't apply before Jan. 1, 2015.
The regulation only applies to rollovers from one IRA to another, as well as one Roth IRA to another. Rollovers out of retirement plans and Roth conversions aren't covered under this rule.
The latest announcement from the IRS provides additional clarity on the timing and application of the regulation. For one thing, the agency confirmed that the rule will take effect on Jan. 1, putting to rest concerns that rollovers made anytime in 2014 might be subject to the regulation.
Further, the IRS's announcement clarifies that the rule applies to all of a given individual's accounts. Previously, some people thought that the rules applied individually to IRAs and Roth IRAs, hence permitting one IRA-to-IRA rollover and one Roth-IRA-to-Roth-IRA rollover. That's not the case, you get only one of these transactions per 365-day period.
Clients who are moving an IRA and who end up getting a check need to ensure that the check is being made to the receiving IRA and not to them personally. A check made directly to the client is considered a rollover, and the rules will apply. A check made to an institution, however, is considered a trustee-to-trustee transfer.
Naturally, with all tax law changes, you should consult your CPA to see how such a change may impact you directly.
The Internal Revenue Service has just announced the cost-of-living adjustments and other dollar limitations for retirement plans that take effect January 1, 2015.
Maximum Defined Contribution Plan Annual Addition
$53,000 - increase of $1,000 from 2014.
Effective for limitation years ending in 2015.
Salary Deferral Limit
$18,000 - increase of $500 from 2014.
Catch-up Limit for 401(k), 403(b), and 457 Plans
$6,000 - increase of $500 from 2014.
$120,000 - increase of $5,000 from 2014.
Applies for determining HCE's in 2016, based on compensation in 2015.
Maximum Compensation for Retirement Plan Purposes
$265,000 - increase of $5,000 from 2014.
Applies to plan years beginning in 2015.
Compensation for Determining if Officers can be Key Employees
$170,000 - remains unchanged from 2014.
Taxable Wage Base
$118,500 - increase of $1,500 from 2014.