Tuesday, April 25, 2017


From time to time we get questions about the tax implications of taking funds from the different types of IRAs.  Regular IRAs and Roth IRAs have differing distribution rules.  Following is a short summary.

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For Roth IRAs, contributions can be withdrawn at any time, tax and penalty free. However, a different standard applies to investment earnings.  For earnings in a Roth IRA, there is a five-year rule, which states you must hold the account for five years before a withdrawal of your investment earnings is considered qualified.  Otherwise, you will pay taxes plus a 10% penalty on the earnings portion of the distribution.  In addition to the five-year rule, to be considered qualified, a withdrawal that includes earnings must meet one of the following conditions:

  •  Use the withdrawal (up to a $10,000 lifetime maximum) to pay for a first-time home purchase.
  •  Use the withdrawal to pay for qualified education expenses.
  •  Be at least age 59 ½.
  •  Become disabled or pass away.
  • Use the withdrawal to pay unreimbursed medical expenses or health insurance if you’re unemployed (additional rules apply).
  • The distribution is made in a series of substantially equal periodic payments (‘SSEPP’), which locks you into taking at least one distribution per year for at least five years or until you turn 59 1/2, whichever comes last. 

For IRAs that fall under traditional IRA rules, withdrawals taken before age 59 ½ will be taxed and
penalized 10%.  While you can’t avoid taxes on the traditional deductible IRA distribution, there are exceptions that would waive the early withdrawal penalty.  The list of exceptions are as follows:
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  • Use the withdrawal (up to a $10,000 lifetime maximum) to pay for a first-time home purchase.
  • Use the withdrawal to pay for qualified education expenses.
  • Be at least age 59 ½.
  • Become disabled or pass away.
  • Use the withdrawal to pay unreimbursed medical expenses or health insurance if you’re unemployed (additional rules apply).
  • The distribution is made in a series of substantially equal periodic payments (‘SSEPP’), which locks you into taking at least one distribution per year for at least five years or until you turn 59 1/2, whichever comes last.   

For SSEPP distributions which deviate from the distribution schedule before the appropriate amount of time has passed, the tax penalty can be imposed on all amounts withdrawn up to that point. The amount of the distributions must be based on an IRS approved calculation that involves your life expectancy, your account balance, and interest rates.  There are three options to calculate your specified withdrawal schedule, and they are required minimum distributions, amortization, or annuitization. 

You can take the substantially equal payments on a monthly basis.  The monthly payment under the RMD method would be the annual calculated amount divided by 12.  Under the amortization and annuity methods, the choice of having the payment made monthly should be part of the original calculation.

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Now, to a lighter subject.  The 2018 Dodge Challenger SRT Demon may be one of the most well-muscled muscle cars to ever come out of Detroit.  It made its debut at the New York Auto Show recently, to a rousing reception.  The car features 840 horses, the ability to lift its front wheels off the ground, and just one seat – for the driver.  The waiting list for one already exceeds the 3000 cars Dodge plans to build.  You can read more at http://www.pressreader.com/usa/usa-today-us-edition/20170412/281741269284235.

Dodge, unlike competitors who have focused on fuel efficient alternative or hybrid vehicles, has built a stable of top drawer muscle machines, including the Challenger, Charger, and Viper.  Say what you will about the state of the American auto industry, but they rule both the muscle car category and the land yacht category, both, to my mind, uniquely American.

Quote of the week:

“The hardest thing in the world to understand is the income tax.”
                                                                        Albert Einstein

Thursday, April 20, 2017


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Two things to note first this week, which are taxes and politics. 
First, the tax filing deadline for federal income taxes is April 18th.  Typically it would be Monday April 17th, since the 15th falls on Saturday this year.  However, the 17th is a holiday in the DC area, so this year, your tax filing deadline is Tuesday April 18th.
You can file an extension, of course, and many do, using Form 4868.  This gives you the option of filing at any time within the next six months, with the final filing deadline for 2016 being on October 16th, 2017.  Note that an extension of time to file is not an extension of a time to pay.  If you have a balance due the IRS, you must pay that by the 18th.

The second item is the special election for Georgia Congressional District 6.  Tom Price, former representative from District 6, has been appointed as Health and Human Services Secretary, in the Trump administration.
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The special election is being held Tuesday, April 18th.  The field includes eleven Republicans, five Democrats, and two Independents.  If you live in District 6, we encourage you to vote.  It would be nice if the potential representatives were subject to the same rules the voters are, meaning they must live in the district in order to be a candidate to represent the district.  That’s not the case in Georgia.

Speaking of politics, let me offer some clarity.  The United States of America is not, nor has it ever been, a democracy.  It is a representative republic.  Of the available forms of governance, a representative republic is probably the least obnoxious for the majority.  That is of course, until the populace discovers, as Cicero, Jefferson, and others have noted, that they can vote themselves benefits from the Treasury.

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Speaking of tax deadlines, a couple of additional notes.  If you have an interest in making IRA contributions, whether deductible, non-deductible, or Roth, you may make those until April 18th, provided you qualify, unless you have already filed your return.  The contribution limit is $5500 per person.  IRA contributions require you to have earned income, and there are limits on the types of IRA contributions you can make, based on income, and your access to other retirement plans.  For those of you age 50 and older in 2016, you get a bonus.  You can contribute up to $6500.

If you are an employer, and have in mind making some type of employer contribution to a retirement plan, you have until the earlier of the time you file your corporate return, including extensions, or September 15th, 2017, which is the final return filing deadline for corporate returns.  Employer contributions are typically SEP IRA contributions, or match, discretionary, or profit-sharing contributions tied to a 401(k) plan, or defined benefit or cash balance contributions.

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On the economic front, the recent jobs report showed the U.S. adding just 98,000 new jobs in March, roughly half analysts’ estimates.  In spite of this, the official unemployment rate dipped to 4.5% in March, from 4.7% in February.

Digging into the jobs report a bit, we see that 28,000 jobs were added in manufacturing, and 70,000 were added in services.  Average hourly earnings were up 0.2% for March, and are up 2.7% in the last twelve months.

Most Americans have access to terrific health care.  The challenges with health care in America revolves around two issues.  One is financing, as in who is going to pay for it?  The other is the delivery of top quality care to those Americans in rural or isolated areas.

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Stroke victims have about a three hour window during which they can receive tPA (tissue plasminogen activator), a clot-busting treatment.  The tPA treatment is highly effective in treating strokes but, in order to prescribe it, neurologists must view a CT scan to confirm blockage to the brain.  Many stroke victims in rural areas are beyond the three hour window by the time they visit their local hospital, and are then transferred to a larger hospital with the staff and technology to properly evaluate their condition, and prescribe treatment.

Five specialists from Augusta University, formerly Medical College of Georgia, including Grant Kohler and Dr. David Hess, were determined to make lifesaving changes which would allow faster diagnosis and treatment for rural stroke patients.  In 2003, they launched REACH, one of the nation’s first telestroke programs, which allowed MCG neurologists to connect with eight hospitals in East Central Georgia via fairly primitive audio and video hardware.

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The technology worked, and has continued to improve, saving lives and improving outcomes.  Due to demand, Kohler and Hess have commercialized the concept, as REACH Health, and it is making a difference across the country.  You can read the entire article in Georgia Trend, at http://www.georgiatrend.com/April-2017/Trendsetters-Reaching-Rural-Patients/. 

Quote of the week:

“Giving money and power to government is like giving whisky and car keys to teenage boys.”                  P.J. O’Rourke

Tuesday, April 11, 2017


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On April 6, 2016, the Department of Labor (DoL) issued its fiduciary rule, which we consider a major step forward for the world of professional financial advice.  The rule states that brokers can no longer earn commissions and other forms of conflicted advice compensation from consumers, unless they agree to do so pursuant to a Best Interests Contract (BIC) agreement with the client.  This BIC agreement commits the broker who chooses to give advice to a fiduciary standard, meaning that the advice given must be in the best interests of the client.
And further, the broker must give disclosure, and be transparent, about the products and compensation involved. 
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This rule has caused quite the stir on Wall Street, and among all manner of financial institutions and “advisors”.  The most vocal and primary critics of the DoL fiduciary rule are those firms which stand to lose the most through the implementation of the rule.  These firms are primarily brokerage firms, represented by the Securities Industry and Financial Markets Association, or SIFMA, and the insurance companies who specialize in annuities, represented by organizations such as the National Association for Fixed Annuities, and the American Council of Life Insurers. 
Both personally and professionally, we applaud this rule.  We have chosen to serve as fiduciaries to clients, including retirement plans, and co-fiduciaries to plan trustees, for many years.  We embrace this role, as we believe it serves clients well.  Of course, our business is the giving of professional advice, and related administrative and management services.  Our business is specifically NOT the selling of financial products. 
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The fiduciary rule was to have gone into effect on April 10th, 2017.  Last Wednesday, the DoL delayed implementation for 60 days, until June 9th.  While the rule and its implementation have become a political football, we fully expect the rule to become law.  Whether brokers like it or not, and they don’t, societal and cultural trends, as well as legislation and regulation, are demanding transparency, full disclosure, and professional financial advice that is distinct and separate from the placement of products. 
Note that this DoL fiduciary rule has expanded the application of the fiduciary standard to IRAs, and not just to retirement plans, which have long been the DoL’s primary focus.  However, as noted above, we expect the trend toward a fiduciary approach regarding financial and investment advice to continue, regardless of the tax status of the assets or cash flow in question. 

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One challenge for consumers though, is gaining clarity on the scope and use of the word “fiduciary”.  The DoL ruling in question mandates that those advisors interacting with retirement plans and IRAs put the client’s interest first.  For decades though, anyone offering advice to retirement plans has been held to a fiduciary standard.   

While in our opinion enforcement of this fiduciary standard for those offering advice to retirement plans has been lax in past decades, the DoL has been stepping up its enforcement activity over the last ten years or so.  This is as it ought to be, as far as we are concerned. 

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For those who have responsibility for retirement plans, they have begun reading and hearing more about their role as fiduciaries over the last several years, even before the introduction of the current rule.  Within the context of a retirement plan subject to ERISA, there are roles as fiduciaries defined by ERISA Sections 3(16), 3(21), and 3(38).  We will cover these in more detail in future commentaries. 

Quote of the week: 

“Stewardship is the hallmark of life on earth.”
                                                                                Sunday Adelaja

Tuesday, April 4, 2017


Once again, the stock market was kind to us, in the quarter just finished, giving us two back to back solid quarters in the equity markets.  The bond or fixed income market also had a good first quarter of 2017, unlike its experience during the fourth quarter of 2016. 

The question on many minds is how much longer the bull market can continue, given that we are now eight plus years into this run.  I don’t know.  Therefore, we have chosen, both personally and professionally, to take a long term view, to embrace uncertainty, and to have a deep understanding of what money can and cannot do.

Looking at specific investment sectors for the first quarter, the Dow Jones Industrial Average was up 4.56%, the S&P 500 was up 5.53%, and the NASDAQ Composite was up 9.82%.  Turning to international markets, the MSCI Emerging Markets Index moved from 380 to 423 during the first quarter, an increase of 43 points, or 11.3%.  The MSCI Europe and Middle East Index moved from 89 to 95 during the first quarter, an increase of 6 points, or 6.7%.

Yield on ten year Treasuries stand at 2.4%, about where they started the year, in spite of the Fed’s interest rate increase.  The Fed is suggesting another two or three interest rate increases this year.  It is very likely that bond prices already reflect these anticipated changes.  BLV, the Vanguard long bond ETF, started the year at $89.13, bottomed in mid-March at $87.41, and finished March at $90.04.

As noted in past commentaries, the market’s outperformance appears to be driven by the expectation of tax reform and eased government regulation.  To date, Congress and the White House are still working toward achieving these goals.

Turning our attention to the economy, GDP during Q4 2016 was just over 2% on an annualized basis, roughly in line with performance among heavily regulated, mature economies.  It is possible to increase this growth, though such growth would require significant intent and follow through on the part of Congress, the White House, and regulators. 

The referenced tax reform and regulatory easing would be good steps in the right direction.  By way of information, an increase to a 3% annual growth rate from a 2% growth rate would add more than $180 billion in economic activity, based on 2016 GDP of $18.55 trillion.  Project this difference over ten years, and it’s not hard to imagine hundreds of thousands of new jobs, increasing wages, billions in capital formation, thousands of new business start-ups, significant increases in tax revenue to balance strained budgets, and a variety of other positive outcomes.

Consumer spending was up 2.4% during Q4 2016.  Household finances are fairly sound, according to Moody’s, with household debt service near a 35 year low, and household savings holding steady at close to 5%.  My guess is that the trauma of 2008-09, and the financial habits developed by many during that time, won’t be soon forgotten.

Kate Taylor wrote an interesting article for Business Insider on hometown food retailer Chick-fil-A.  According to the article, which you can find at http://www.businessinsider.com/chick-fil-a-is-the-most-polite-chain-2016-10, the key to the chain’s success is politeness.  Based on just my experience, it seems that the words “please”, “thank you”, and “my pleasure” are imbedded in the DNA of all Chick-fil-A employees.  The time, energy, and money that the company invests in training apparently pays off, as the stores average $4 million in annual sales, compared to the KFC average of $1 million per store.

Quote of the week:

“Politeness is the flower of humanity.”
                                                                               Joseph Joubert

“Be polite; write diplomatically; even in a declaration of war one observes the rules of politeness.”
                                                                            Otto von Bismarck