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Month: April 2020

What does the economic impact of the novel coronavirus (COVID-19) mean for your financial plan?

This is the question many individuals and families are asking in today’s uncertainty. Aside from the obvious concerns for the health and safety of the community, market volatility is stressful and economic slowdown may be hard on business owners and employees as we navigate this pandemic as a society.

Ballast Advisors, a Registered Investment Advisor (RIA) and fiduciary firm based in the Twin Cities, guides individuals and families to achieving their goals using financial planning and time-tested investment strategies.  We caught up with Managing Partner Paul Parnell to have him answer a few frequently asked questions during this period of financial uncertainty and anxiety.

Will this recession last?

Steep declines in the stock market have often coincided with a downturn in the economy. There are still many unknowns, but since World War II, 9 out of the past 12 Bear markets have resulted in recessions, defined as the market dropping 20% or more from its peak.

“It’s reasonable at this time to prepare for a longer-term recession,” says Paul Parnell. “It is hard to keep emotions out of it, but there are smart steps that you can make now to stay financially sound.”

Should I throw in the towel?

Panic selling or “capitulation” is what you begin to see in these uncertain times, but it is important investors understand some key points.

“If you have a solid financial plan, you’re already prepared for this ahead of time,” says Parnell. “At Ballast Advisors, we work with our clients to have balanced and diversified investment portfolios and we help to mitigate risk depending on our client’s age and stage of retirement. Generally, most people gradually reduce risk as they approach retirement.”

Of course, a diversified portfolio is no guarantee that you won’t suffer volatility, but long-term strategies are based on the idea that financial markets are historically cyclical.

“We start to see very high emotions in times like this, and people are tempted to throw in the towel,” says Parnell. “And while it’s very difficult to watch, capitulation can be a detriment for your entire portfolio. For example, after the lows of 2009 recession we saw markets increase 45-54% from the bottom. If you miss this opportunity, it may impact you forever.” 

What changes do I need to make in spending or saving?

In addition to your long-term investments, Ballast Advisors suggests this is a good time to review your budget.

“Discretionary expenses are the first ones to go,” says Parnell. “If you don’t have to reduce savings, don’t.”  Keeping with the philosophy of buy low and sell high, Paul adds, “Try to increase savings, as long as you have the proper cash reserve.”

With the mandated shutdowns, Ballast Advisors suggests you save money on travel, activities, dining out, and similar activities. You may also find savings by negotiating new rates on services, as companies may rather keep you as a customer than lose your business.

“Typically having 3-6 months, salary in cash reserve is recommended. If you are dealing with uncertainty with unemployment, you should increase that to 12 months,” he says. After that is established, Parnell recommends looking at opportunities to increase long-term investment savings.

“Market downturns are generally temporary.  You stand to make money on dollars you invested in a downturn,” says Parnell. “We saw it happen after 9-11 and in 2009. If you’re a retiree, and you supplement income from your investments, cutting your current distributions can make a big difference when markets recover.”

Emotions and Money

“I love Warren Buffet’s quote on the stock market and investing: ‘Be fearful when others are greedy and greedy when others are fearful’,” says Parnell. “You cannot tie emotions to decisions about money.”

Anxiety levels are high for all investors currently. But it’s important to keep perspective, and he suggests limiting your exposure to media that tracks the market volatility daily. 

“I cannot emphasize that enough to clients, I’d be a nervous wreck if I watched the markets on TV all day, and I am in this business,” he remarks. “We believe in staying well grounded.”

These times are hard, no doubt, however, this is the reason you do financial planning, to plan for the uncertainties in life.  This has worked in the past and it will guide you in the future.

“If you are looking at retirement in 5-10 years, you should be looking for a financial advisor, it’s critical,” says Parnell. “Your portfolio should begin to match what it will look like in retirement.”

For more information on how Ballast Advisors helps clients with personal financial planning, executive benefits, and saving for retirement, see www.ballastadvisors.com/.

 

 

IMPORTANT DISCLOSURES

The opinions expressed are those of Ballast Advisors, LLC. The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass.

Ballast Advisors, LLC is a registered investment advisor under the Investment Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. More information about the firm, including its services, strategies, and fees can be found in our ADV Part 2, which is available without charge upon request.

 

What You Need to Know About the SECURE Act

Recently Congress passed both the SECURE Act and the CARES Act into law.  Although these Acts are comprehensive in aggregate, Ballast Advisors financial professionals have comprised a summary of the sections we want our clients to understand.

If you have questions, please contact your financial advisor.

 SECURE ACT SUMMARY

Required Minimum Distributions (RMDs) to Begin at Age 72

Section 114 of the SECURE Act delays the commencement of Required Minimum Distributions (RMDs) from most retirement accounts until age 72 (from the previous beginning date of age 70 ½.)

  • Retirees will still be able to delay their first RMD until April 1stof the year following the year for which they must make their first RMD. So, a retiree turning age 72 on January 24, 2021 has until April 1st, 2022 to take their first RMD (but will have to take two RMDs during 2022, one for 2021 and one for 2022). 

Qualified Charitable Distributions Still Allowed at Age 70 ½

Even though RMDs don’t begin until age 72 under the SECURE Act, Qualified Charitable Distributions (QCDs) are still allowed beginning at age 70 ½. A QCD allows a taxpayer to distribute amounts directly from their IRA to a charity, and such distribution is not includable in income (up to $100,000). Once the taxpayer reaches age 72, the QCD will be allowed to reduce his or her RMD, just as before.

Traditional IRA Contributions Allowed After Age 70 ½.

Beginning in 2020, anyone—regardless of age—will be allowed to contribute to a Traditional IRA, provided such person has earned income (income from wages or self-employment). So, if a taxpayer is working, or has a spouse who is working, he or she can continue to contribute to a traditional IRA after age 70 ½.

End of the ‘Stretch’ IRA

The end of the ‘stretch’ IRA for most non-spouses. The stretch IRA allowed designated beneficiaries to stretch distributions over their life expectancy after inheriting an IRA. The new law requires the entire inherited IRA to be distributed by the end of the 10th year following the year of inheritance. However, there are no RMDs, so beneficiaries can choose to liquidate the inherited IRA over several years or all at once, if it is emptied by the end of the 10th year.  

  • This new rule applies to both traditional and Roth IRAs. Since Roth IRA distributions are tax-free, waiting until the 10thyear to empty the Roth IRA can be a good strategy.
  • Minor children of the original retirement account owner aren’t subject to the 10-year rule until they reach the age of majority.

Inclusion of Student Loans and Apprenticeships for Qualified Education Expenses From 529 plans

Expenses for Apprenticeship programs are now included in Qualified Higher Education Expenses, provided the program is registered and certified with the Department of Labor.

  • Also, “Qualified Education Loan Repayments” have been included as qualified higher education expenses. Such distributions from a 529 plan used for student loan repayments are limited to a lifetime amount of $10,000.
Source:  Setting Every Community Up for Retirement Enhancement Act of 2019 – SECURE

 

Ballast reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs. Past performance is not indicative of future results. Nothing contained herein constitutes an offer to buy or sell a particular security or investment strategy. The material presented is derived from a third-party source believed to be reliable, but its accuracy and certainty cannot be guaranteed.

Ballast Advisors, LLC is an independent investment adviser registered under the Investment Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. More information about Ballast, including our investment strategies, fees and objectives, can be found in our ADV Part 2 which is available upon request.

What You Need to Know: CARES ACT

Coronavirus Aid, Relief, And Economic Security Act: Letter Tiles CARES Act On US Flag, 3d illustration

Recently Congress passed both the SECURE Act and the CARES Act into law.  Although these Acts are comprehensive in aggregate, Ballast Advisors financial professionals have
comprised a summary of the sections we want our clients to understand.   

If you have questions, please contact your
financial advisor.

 CARES ACT SUMMARY

INDIVIDUALS

  • Provides rebates of up to $1,200 for single individuals and $2,400 for joint filers.  This rebate is subject to a phase-out beginning at adjusted gross income of $75,000 and $150,000 respectively.  Taxpayers with qualifying children will receive an additional $500.  The rebates will be based upon 2019 returns if already filed.  If 2019 has yet to be filed, then rebates will be based upon the 2018 returns.  The IRS is still reviewing multiple methods of delivery.

    • Advanced refund payments are based on your most recent tax return. If you have filed a 2019 return it will be based on your 2019 income.  If you have not yet filed a 2019 return it will be based on your 2018 income.  If you don’t qualify based on your 2018 or 2019 tax return, you may on your 2020 tax return, in which case your rebate will be received in 2021. 

    • To qualify, the taxpayer must have an SSN and not be a dependent of another taxpayer.

  • Provides waivers on the 10% early withdrawal penalty for distributions of up to $100k made from qualified retirement plans and IRAs, provided these distributions were made because your finances were directly impacted by COVID-19.  You may return your taxable withdrawal over three years without consideration of the maximum retirement plan contribution limit. 

  • Loosens loan thresholds and repayment terms for loans taken out from certain retirement plans.  Please contact your employer to determine the specifics of their loan rules.

  • Waives RMDs (Required Minimum Distributions) from retirement plans including IRAs.  RMDs already taken in 2020 generally cannot be returned to the retirement plan.

  • Allows an above the line deduction of up to $300 of cash charitable contributions for those individuals claiming the standard deduction.

    • Only cash contributions are allowed for the $300 deduction. Contributions to a Donor Advised Fund or a private foundation do not qualify for the $300 above the line deduction.  This provision will not expire in 2020, making it available in future years.

  • Allows a relaxation of the income limit for charitable contributions for those individuals itemizing their deductions on Schedule A.

    • Section 2205 provides that the limitations on charitable contributions for Schedule A are repealed for 2020, so cash contributions can offset 100% of income.

Source:   Coronavirus Aid, Relief, and Economic Security Act

BUSINESSES

  • Section 2302 provides that all employer payroll taxes for 2020 could be deferred. Employers would remit 50% on 12-31-2021 and 50% on 12-31-2022 with no interest charged in the meantime.  This rule also applies to self-employment taxpayers.

  • Section 2301 creates an employee retention tax credit for employers. The employer will get a refundable credit for employment taxes paid to employees.  Eligible employers have a business that was fully or partially suspended during 2020 because of an order from a government authority.  Also, employers can qualify if they were open and revenue was down 50%  or more from the prior year quarter over quarter.  Qualifying wages are up to $10,000 per employee for the year.  Employers who take a small business interruption loan are not eligible. 

  • Section 2307 fixes the TCJA definition for qualified improvement property so it will have a 15-year life span. With a 15-year life span on qualified improvement property, 100% bonus depreciation would be allowed on the qualified improvement property, retroactive to 2018.  Amended returns could be filed for 2018 and 2019 if already filed.

  • Modifies the charitable contribution limitations based on income for corporations and extends this to donation of food inventory.

  • Section 2206 expands the employer paid tuition assistance to include payment of student loans.

    • An employer can pay up to $5,250 of tuition or student loans tax-free for an employee in 2020. In 2021 the rule reverts to tax-free for only tuition.

  • Section 2303 modifies the rules around Net Operating Losses. NOLs created in 2018, 2019, 2020 can be carried back 5 years with no 80% limitations.  So, losses from 2018, 2019, or 2020 could be carried back 5 years and used to fully offset income in prior years for individuals and C Corps.

  • Section 2305 modifies AMT credit rules for C Corporations.

  • Section 2306 modifies the Section 163(j) interest expense limitations. They are modified to allow interest expense of 50% of adjusted taxable income instead of 30% for the 2019 and 2020 tax years.  The 163(j) limitation returns to a 30% limit in 2021.

  • Provides additional funding options including the Paycheck Protection Program (referred to as PPP) under SBA 7a program guidance.  The PPP does have a potential loan forgiveness portion.

Source:   Coronavirus Aid, Relief, and Economic Security Act

Ballast reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs. Past performance is not indicative of future results. Nothing contained herein constitutes an offer to buy or sell a particular security or investment strategy. The material presented is derived from a third-party source believed to be reliable, but its accuracy and certainty cannot be guaranteed.

Ballast Advisors, LLC is an independent investment adviser registered under the Investment Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. More information about Ballast, including our investment strategies, fees and objectives, can be found in our ADV Part 2 which is available upon request.

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