Coronavirus and the Markets

Posted by The Edgemoor Investment Advisors Team on April 6, 2020

In this latest installment of our quarterly newsletter, we share our observations on the dramatic events of the first quarter of 2020 and our outlook for future quarters.  Click here to go to the full report on our website.  The following are a few highlights:

  • The past several weeks have been difficult, and we know watching the coronavirus spread and the stock market fall is unnerving, even to long-term investors. We believe that an essential part of our work on our clients’ behalf involves remaining patient and disciplined in times such as these.
  • The worldwide spread of the novel coronavirus and COVID-19, the disease it causes, has upended societies, with widespread restrictions on business, travel, and social interaction sharply reducing global economic activity and causing layoffs or furloughs of millions of workers.
  • COVID-19 is not the only issue that has unnerved investors. In addition, an ill-timed dispute between Saudi Arabia and Russia over oil production, in which both increased output, combined with lower global demand to cause oil prices to plummet.
  • The spread of COVID-19 and the oil price decline have rattled global markets. After rising through mid-February, the S&P 500 index fell sharply into bear market territory in March.  Over the past month, we have seen some of the stock market’s largest ever one-day swings, both up and down. After eleven years, the longest bull market in history has come to an end.
  • As jarring as stocks’ drop has been, we think it is helpful to put the recent pullback into perspective. The S&P 500 index currently trades at the same level as at the beginning of 2019, so it has essentially given back the huge gains from last year. Also, the S&P 500 index is still up over 285% since the depths of the financial crisis.
  • In response to the outbreak, central banks and governments around the world have announced aggressive initiatives to mitigate the economic impact of the spread of the coronavirus. 
    • The Fed has so far cut interest rates to near zero, committed to buying as much government debt as needed to shore up markets, and announced unprecedented plans to buy corporate bonds, including the riskiest investment-grade bonds.
    • Meanwhile, the U.S. Congress passed an over $2 trillion relief package that provides for direct payments to individuals, expanded unemployment insurance benefits for workers, loans and grants to businesses, and funds for states and healthcare providers.
  • We believe the congressional relief package is vitally important and necessary to dampen the effects of the sharp drop in economic activity due to quarantines and lockdowns. We also expect there will be a need for additional support as the United States and the rest of the world continue to fight the coronavirus.
  • The market is clearly anticipating more bad news, and it remains to be seen whether current valuations appropriately reflect future events.
  • We are watching developments closely and monitoring the virus’s impact on the economy, the markets, and our clients’ portfolios. We have sold a few holdings that we believe to be most exposed to these issues, a move that raised additional cash for future investment and should reduce risk in our portfolios.
  • We also expect to resume investing available cash after the market volatility calms down, since the shares of some high-quality companies that we do not own are now available at prices well below our estimates of their intrinsic value.
  • We know recent market conditions have been stressful, and we appreciate your ongoing patience and confidence in our approach and stewardship of your assets.

The Edgemoor Team

The S&P 500 index is an unmanaged market-capitalization-weighted index of 500 common stocks chosen for market size, liquidity, and industry group representation to represent U.S. equity performance. The S&P 500 index is discussed for comparative purposes only. The comparisons have limitations because the indexes have volatility, investment, and other characteristics that differ from the investment strategies of Edgemoor. Further, it is not possible to invest directly in the indexes.

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CARES Act

Posted by Gay Truscott on April 6, 2020

On March 27, the President signed into law the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), the third COVID-19 relief bill.  The more than $2 trillion stimulus package seeks to address financial pressures facing individuals, businesses, state and local governments, and the healthcare system due to the pandemic.

The law also carries notable provisions that impact IRA accounts, including the following:

1. Required Minimum Distributions (RMDs) for 2020 have been waived for all IRAs and retirement plan accounts, including RMDs from inherited IRAs that were established prior to 2020.  If you already took your 2020 RMD, you may have up to 60 days to return a single distribution to an IRA or deposit it in another qualified retirement account without owing taxes on it. You also could convert the amount into a Roth IRA.

2. For those who qualify, the CARES Act also allows for a coronavirus-related distribution in 2020 from IRAs of up to $100,000, without being subject to the 10% early withdrawal penalty if the IRA owner is under 59½. The income tax on the coronavirus-related distribution may be spread evenly over 3 years. Or, the distribution may be repaid to an eligible retirement plan within a 3-year period.

This blog post should not be construed as tax advice.  Each of these provisions is subject to limitations as well as further guidance from the IRS.  Please consult your tax advisor for more information related to your personal tax situation.

The Edgemoor Team

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The SECURE ACT – A Brief Overview

Posted by Gay Truscott on January 30, 2020

On January 1, 2020, the Setting Up Every Community for Retirement Enhancement Act (SECURE Act) went into effect, setting forth nearly 30 new provisions impacting retirement savings and planning.  We want to summarize a few of those provisions that have the potential to impact the investment and planning strategies of our clients and friends:

Required Minimum Distribution (RMD) age increased from 70 ½ to 72:

The law extends the date by which individuals must start taking RMDs from their IRAs to 72 from 70 ½.  This applies only to individuals turning 70 ½ after December 31, 2019 (no retroactive changes for those already 70 1/2 at year-end).  The change was explained to be an easier benchmark age to understand and calculate.  In addition, those who are still working after 70 ½ can now contribute to their IRAs after age 70 ½ to the extent they have earned income.

Stretch provision for most non-spouse beneficiaries of IRAs eliminated:

Under the old rules, non-spouse beneficiaries of IRAs (both traditional and Roth IRAs) were eligible to re-calculate RMDs based on their own life expectancy not that of the original IRA holder.  In other words, a 50-year-old son or daughter who inherits their 80-year-old parent’s IRA could take a lower RMD amount than their parent had, based on the 50-year-old’s longer life expectancy.  In the new law, that “stretch” provision is eliminated and replaced with a fixed, ten-year time period under which the entire inherited IRA balance must be distributed.  The potential tax impact on the non-spouse beneficiary is enormous.  Imagine a $1 million inherited IRA that previously could be distributed over the 30-35-year life expectancy of that 50-year old, now must be distributed fully over just 10 years, though there is flexibility in whether those distributions are taken evenly over the ten years or all towards the end of the period.  As always, all distributions are taxed as ordinary income. 

Exceptions to this provision are made for beneficiaries who are surviving spouses, minors, disabled, or chronically ill, among other exceptions.  One strategy that may alleviate some of the increased future tax burden on heirs is to consider converting a traditional IRA to a Roth IRA, depending on your individual tax situation.   Please consult your advisor.

Annuities may be added to 401k plans:

Despite this change, we would not advocate or recommend to our clients the purchase of an annuity in a 401k plan.  Annuities typically carry high fees and low returns.  Furthermore, there is no tax benefit to holding an annuity inside a 401k because a 401k plan is already a tax-deferred savings vehicle.  It may also be difficult to pass 401k assets to beneficiaries if they have been annuitized.  Please consult your advisor before making an annuity election in your 401k plan.

Qualified Charitable Contributions with IRA Distributions:

The provision that allows up to $100,000 of an individual’s RMD to be made as a direct qualified charitable contribution to avoid taxation of that IRA distribution is largely unchanged.

Please contact us if you have any questions about the SECURE Act and its impact on your investment strategy or financial plan.  Please also consult your estate planning and tax professionals to review the impact on your estate and tax plans.

We hope you have found this helpful.

Edgemoor Investment Advisors Team

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Be Tax Efficient This Giving Season

Posted by Timothy Coughlin on November 7, 2019

As we approach the end of the year, charitable giving is once again expected to ramp up between Thanksgiving and December 31st, and we at Edgemoor would like to share some advice with any clients that wish to make donations. Although there is no wrong way to donate to charity, there are steps you can take to minimize taxes and maximize impact.

Gifting Appreciated Stock

You can avoid taxable capital gains if you donate appreciated securities that have been held in taxable accounts for at least a year. This is preferable to selling the securities and donating the cash proceeds, because you avoid realizing long-term capital gains while still getting the full deduction for up to the fair market value of the donated securities if you itemize your deductions. We recommend donating the securities with the largest capital gains to maximize the tax benefits of charitable giving.

Making Direct Donations vs. Funding Donor-Advised Funds

Appreciated securities may be donated either directly to charities or to a Donor-Advised Fund (DAF). DAFs are investment vehicles for giving to charitable organizations. Edgemoor offers DAFs through its custodians, Fidelity Investments and Charles Schwab & Co.

Appreciated stock donations to DAFs have several advantages:

  • You can choose the charities that will receive grants from DAFs
  • You can take the full itemized tax deduction upfront for donating to DAFs and then distribute the donated assets to the designated charities over time
  • You can invest and grow your assets donated to DAFs if you wait to distribute them over time
  • You can get help from DAFs to research charities, track your donations, and set up automatic recurring donations

Fidelity and Schwab both require a minimum initial balance of $5,000 for DAFs and provide lists of select funds for investment of donations pending their distribution to charities. For accounts exceeding $250,000 you can have your DAF funds managed by your investment advisor. Administrative fees for DAFs range from 0.10%-0.60% based on account size.

We at Edgemoor would be happy to provide allocation recommendations free of charge for DAFs invested in the lists of DAF select funds, or to manage DAFs exceeding $250,000. Setting up a charitable giving account through a DAF is easy, and Edgemoor is ready to prepare all forms and guide you through the process.

Donating IRA Distributions

Clients over the age of 70 ½ who have an IRA can donate up to $100,000 of distributions to charity instead of receiving it as taxable income. We recommend using funds from non-IRA accounts for donations above the Required Minimum Distribution amount. This strategy allows IRA assets to grow tax-free for as long as possible, ultimately increasing the funds available for future donations, expenses, and beneficiaries of Inherited IRAs.

Timing Your Donations

You receive the itemized tax benefits from giving to charity, either directly or to a DAF, in the year you make the donation. There is a maximum deduction you can take for charitable giving which is a function of your taxable income. Spreading out your donations over multiple years may maximize your tax savings. However, if you have a higher than usual income in a single year (e.g. from selling a family business), it may be best to make one large donation to a DAF to reduce your large tax bill that year, then distribute the funds to designated charitable organizations over multiple years.

If you wish to receive tax benefits in a certain year, the charitable organizations or DAFs must receive your donations by December 31st of that year. We recommend beginning to transfer assets at least several weeks before the end of the year to ensure the charitable organization or DAF can process your donations in time.

You should always consult your tax professional about your personal tax situation.

Contacting Edgemoor

If you have any questions, please feel free to call 301-543-8881 or e-mail us at gtruscott@edgemoorinv.com.

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A Financial Checklist for Your Newly Minted High School (or College) Graduate

Posted by Gay Truscott on June 18, 2019

Financial planning can begin at any age.  A good starting point for many is when heading off to college, a first job, or the military.  This article, “A Financial Checklist for Your Newly Minted High School (or College) Graduate” provides a valuable checklist of items to think about from budgets to credit cards, healthcare, retirement savings, and information security.   We hope you find it helpful.

This link is to a third party site and is not affiliated with Edgemoor Investment Advisors, Inc.

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