Matthew Chope, CFP® Named to Forbes 2020 Best-in-State List

Center for Financial Planning, Inc.® is pleased to announce that Matthew Chope, CFP® has been named to Forbes 2020 list of "Best-in-State" Wealth Advisors in Michigan for the 2nd consecutive year, where he ranked 82nd in the state.

“Matt always puts his clients first,” said Josh Bitel, CFP®, an Associate Financial Planner who works closely with Matt. “Over the course of 30 years in the industry, he’s helped hundreds of clients by genuinely caring about their needs. Matt remains an outstanding example of how to build and maintain relationships through trust and honest work.”

In addition to helping individuals and families with financial planning, Matt also works with local corporations and non-profits on strategic planning and business management decisions. He oversees and manages several local endowments and is a member of the Financial Planning Association of Michigan, The Estate Planning Council of Metro Detroit, and the CFA Society Detroit.

The Forbes ranking of Best-In-State Wealth Advisors, developed by SHOOK Research, is based on an algorithm of qualitative criteria, mostly gained through telephone and in-person due diligence interviews, and quantitative data. Those advisors that are considered have a minimum of seven years of experience, and the algorithm weights factors like revenue trends, assets under management, compliance records, industry experience and those that encompass best practices in their practices and approach to working with clients. Portfolio performance is not a criteria due to varying client objectives and lack of audited data. Out of approximately 32,000 nominations, more than 4,000 advisors received the award. This ranking is not indicative of advisor's future performance, is not an endorsement, and may not be representative of individual clients' experience. Neither Raymond James nor any of its Financial Advisors or RIA firms pay a fee in exchange for this award/rating. Raymond James is not affiliated with Forbes or Shook Research, LLC.

Timothy Wyman, CFP®, JD Named to Forbes 2020 Best-in-State List

Center for Financial Planning, Inc.® is pleased to announce that Timothy Wyman, CFP®, JD has been named to Forbes 2020 list of "Best-in-State" Wealth Advisors in Michigan for the 3rd consecutive year, where he ranked 62nd in the state.

“It’s great to watch Tim in action, both in his roles as a financial planner and as a leader,” said Andrew O’Laughlin, a Client Service Manager.  “The first words that come to mind when I think of Tim are commitment, enthusiasm, decisiveness, fairness, and diligence.  Tim exudes the core values of The Center, taking phenomenal care of the clients we serve, and leading by example for the people who get to work with him every day.”

In addition to working directly with clients and helping them achieve their financial goals, Tim is the firm’s Managing Partner and a member of the Operations Committee. He is a leader in his profession, serving on the National Board of Directors for the 28,000-member Financial Planning Association. Tim is frequently asked to speak on financial planning topics by local and national media outlets.

The Forbes ranking of Best-In-State Wealth Advisors, developed by SHOOK Research, is based on an algorithm of qualitative criteria, mostly gained through telephone and in-person due diligence interviews, and quantitative data. Those advisors that are considered have a minimum of seven years of experience, and the algorithm weights factors like revenue trends, assets under management, compliance records, industry experience and those that encompass best practices in their practices and approach to working with clients. Portfolio performance is not a criteria due to varying client objectives and lack of audited data. Out of approximately 32,000 nominations, more than 4,000 advisors received the award. This ranking is not indicative of advisor's future performance, is not an endorsement, and may not be representative of individual clients' experience. Neither Raymond James nor any of its Financial Advisors or RIA firms pay a fee in exchange for this award/rating. Raymond James is not affiliated with Forbes or Shook Research, LLC.

The SECURE Act Changes the “Stretch IRA” Strategy for Beneficiaries

Contributed by: Robert Ingram, CFP®

It’s hard to believe that we’re nearly two months into the New Year. As people have had some time to digest the SECURE Act, which was signed into law in late December, our Center team has found that many clients are still trying to understand how these new rules could impact their financial plans. While several provisions of the Act are intended to increase retirement savers’ options, another key provision changes the rules for how non-spouse beneficiaries must take distributions from inherited IRAs and retirement plans.

Prior to the SECURE Act taking effect January 1st of this year, non-spouse beneficiaries inheriting IRA accounts and retirement plans such as 401ks and 403(b)s would have to begin taking at least a minimum distribution from the account each year. Beneficiaries had the option of spreading out (or “stretching”) their distributions over their own lifetimes.

Doing so allowed the advantages of tax deferral to continue for the beneficiaries by limiting the amount of distributions they would have to take from the account each year. The remaining balance in the account could continue to grow tax-deferred. Minimizing those distributions would also limit the additional taxable income the beneficiaries would have to claim.

What has changed under the ‘SECURE Act’?

For IRA accounts and retirement plans that are inherited from the original owner on or after January 1, 2020:

Non-spouse beneficiaries who are more than 10 years younger must withdraw all of the funds in the inherited account within 10 years following the death of the original account owner.

This eliminates the non-spouse beneficiary’s option to spread out (or stretch) the distributions based on his or her life expectancy. In fact, there would be no annual required distributions during these 10 years. The beneficiary can withdraw any amount in any given year, as long as he or she withdraws the entire balance by the 10th year.

As a result, many beneficiaries will have to take much larger distributions on average in order to distribute their accounts within this 10-year period rather than over their lifetime. This diminishes the advantages of continued tax deferral on these inherited assets and may force beneficiaries to claim much higher taxable incomes in the years they take their distributions.

Some beneficiaries are exempt from this 10-year rule

The new law exempts the following types of beneficiaries from this 10-year distribution rule (Eligible Designated Beneficiaries). These beneficiaries can still “stretch” their IRA distributions over their lifetime as under the old tax law.

• Surviving spouse of the account owner

• Minor children, up to the age of majority (however, not grandchildren)

• Disabled individuals

• Chronically ill individuals

• Beneficiaries not more than 10 years younger than the original account owner

What if I already have an inherited IRA?

If you have an inherited IRA or inherited retirement plan account from an owner that died before January 1st, 2020, don’t worry. You are grandfathered. You can continue using the stretch IRA, taking your annual distributions based on the IRS life expectancy tables.

Your beneficiaries of the inherited IRA, however, would be subject to the new 10-year distribution rule.

What Are My Planning Opportunities?

While it still may be too soon to know all of the implications of this rule change, there are number of questions and possible strategies to consider when reviewing your financial plan. A few examples may include:

• Some account owners intending to leave retirement account assets to their children or other beneficiaries may consider whether they should take larger distributions during their lifetimes before leaving the account to heirs.

• Roth IRA Conversions could be a viable strategy for some clients to shift assets from their pre-tax IRA accounts during their lifetimes, especially if they or their beneficiaries expect higher incomes in future years.

• For individuals age 70 ½ or older, making charitable gifts and donations directly from your IRA through Qualified Charitable Distributions (QCD) could be even more compelling now.

• Clients with IRA Trusts as part of their estate plan should review their documents and their overall estate plan to determine if any updates are appropriate in light of the this new 10-year rule.

It’s important to remember that your individual situation is unique and that specific strategies may not be appropriate for everyone. If you have questions about the SECURE Act or you’re not sure what these changes mean for your own plan, please don’t hesitate to contact us!

Robert Ingram, CFP®, is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® With more than 15 years of industry experience, he is a trusted source for local media outlets and frequent contributor to The Center’s “Money Centered” blog.

The Single Most Important Investing Decision

Contributed by: Nicholas Boguth

Unsurprisingly, I think investing is fun. This is one of the reasons I’ve chosen a career in investment management. With that being said, my career is only 6 years in. Is it possible that I only think investing is fun because the stock market has hit a new all‐time high every single year of my career? Do stocks ever fall? Why even own bonds that pay 2% coupons?

With the decade being over, and the S&P 500 rising almost 190% over the prior ten years, it seems like a good time to remind ourselves of a few key investing principles.

• Stocks are risky. Their prices can fall.

• Bonds are boring, but they have potential to help preserve your portfolio.

• Asset allocation is the single most important investing decision you will make.

Asset allocation in its simplest form is the ratio of stocks to bonds in your portfolio. More stocks in your portfolio means more risk. More bonds in your portfolio means more potential to balance out the risk of stocks. As financial planners, one of the first decisions we’ll help you make is the decision of what asset allocation is most likely going to lead to your financial success.

Take a look at the drawdowns of a portfolio of mostly stocks (green line) compared to a portfolio of mostly bonds (blue line). Stocks may have roared through the 2010’s, but no one has a crystal ball to tell us what they will do in the 2020’s. This chart is a good reminder of what stocks CAN do. Be sure that your portfolio is set up to maximize your chance of success no matter what stocks do. If you are unsure about your current portfolio, we’re here to help.

Source: Morningstar Direct. Stock index: S&P 500 TR (monthly). Bond Index: IA SBBI US IT Govt Bond TR (monthly).

Nicholas Boguth is a Portfolio Administrator at Center for Financial Planning, Inc.® He performs investment research and assists with the management of client portfolios.

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Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification and asset allocation.

The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. The IA SBBI US IT Government Bond Index is an index created by Ibbotson Associates designed to track the total return of intermediate maturity US Treasury debt securities. One cannot invest directly in an index. Past Performance does not guarantee future results.

Are Your Medications Covered? How to Choose the Right Medicare Plan

Contributed by: Josh Bitel, CFP®

Let’s take a look at an important aspect of Medicare coverage: Part D, which covers prescription medications (think “D” for drugs). Each Medicare Prescription Drug Plan has a unique list of covered drugs which is called a formulary.

Here are some important notes regarding Medicare Part D coverage:

• Drugs may be placed into different cost “tiers” within the specific formulary

• More common/generic drugs will often be in a lower tier costing you less

• You can choose your Part D plan based on your current list of medications to help you obtain the most appropriate plan for you

• Commercially available vaccines that are medically necessary to prevent illness must be covered by a Medicare drug plan (if not already covered under Medicare Part B)

• You should receive an “Evidence of Coverage” (EOC) each September from your plan which explains what your Medicare drug plan covers, how much you pay, etc.

  • You should review this notice each year to determine if your current plan will continue to meet your needs or if you need to consider another plan for the next calendar year

  • If you do not receive this important document, contact your plan representative

    • Your plan’s contact information should be available via “Personalized Search” on the Medicare website

    • You can also search by your plan name

Common Coverage Rules:

• Prior Authorization: Your prescriber may be required to show that the drug is medically necessary for the plan to authorize coverage

• Quantity Limits: Different medications may have limits on quantity fillable at one time (ex: 10 days, 14 days, 30 days, 60 days, etc.)

• Step Therapy: You must attempt treatment with one or more similar, lower cost drugs before the plan will cover the prescribed drug

If you or your prescriber believe one these coverage rules should be waived, you can contact your plan for an exception. Your plan’s contact information should be available via “Personalized Search” on the Medicare website.

• You can ask your prescriber or other health care provider if your plan has special coverage rules and if there are alternatives to an uncovered drug

  • It is not uncommon to be required to attempt treatment with other similar drugs (often less expensive, lower tier) on your formulary first

• You can obtain a written explanation from your plan which should include the following:

  • Whether a specific drug is covered

  • Whether you have met any requirements to be covered

  • How much you will be required to pay

  • If an exception to a plan rule may be made if requested

• You can request an exception if:

  • You or your prescriber believes you need a specific drug that is absent from your plan’s formulary

  • You or your prescriber believes a coverage rule should be waived

  • You believe you should pay less for a more expensive, higher tier drug since your prescriber believes you cannot take any of the less expensive, lower tier options for your condition

• If you disagree with your plan’s denial of coverage there are five additional levels in the appeals process

Additional Considerations:

• Your Medicare Part D plan is allowed to make changes to its formulary during the year

  • These changes must be made within existing Medicare guidelines

  • If a change is made to your formulary:

    • You must be provided written notice at least 60 days prior to the effective date of the formulary change

    • OR your plan will be required to provide the current drug for 60 days under the previous plan rules

• Many Medicare Advantage Plans (Part C) cover prescription medication coverage, and you cannot have concurrent coverage of prescriptions through both a Medicare Advantage Plan and a Medicare prescription drug plan. You’ll be unenrolled from your Advantage Plan and returned to Original Medicare if you have an Advantage plan with prescription coverage in addition to a Part D Prescription Drug Plan.

• Even if a desired medication is covered, it is important to note that some plans may require fulfillment via mail order services in lieu of local retail pharmacy pickup

• This may be very inconvenient for some (ex: people that travel often) and may be avoidable when comparing plans

If you have any questions, please contact your financial advisor at The Center. We are more than happy to help you or refer you to one of our professional resources.

Josh Bitel, CFP® is an Associate Financial Planner at Center for Financial Planning, Inc.® He conducts financial planning analysis for clients and has a special interest in retirement income analysis.

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Sources: www.medicare.gov this information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete.

Any opinions are those of the author and not necessarily those of Raymond James. Raymond James is not affiliated with Josh Bitel. This material is being provided for information purposes only and is not a complete description, nor is it a recommendation.

Center Welcomes New Partner Nick Defenthaler, CFP®, RICP®

Contributed by: Center for Financial Planning, Inc.®

We are excited to announce Nick Defenthaler, CFP®, RICP® as the newest Partner at The Center! He will continue to lead the firm’s Financial Planning Department and contribute to the Operations Committee in addition to his primary role as Senior Financial Planner. We look forward to working with Nick in his new leadership role.

Growing with the Firm

Nick has been involved in the financial planning profession for over 12 years and joined The Center in 2013. In addition to being a Senior Financial Planner, he is Director of The Center’s Financial Planning Department and a member of the firm’s Investment and Operations Committees. Now, he takes on even more duties as he advances to Partner.

“Soon after joining The Center, I knew that I wanted to be a partner one day. The Center walks the walk when it comes to comprehensive financial planning”.

An Offer of Partnership

The current leadership team invited Nick to become a Partner. Managing Partner Tim Wyman CFP®, JD says that Nick is a tremendous leader at The Center.

“He is a highly technical practitioner who cares about the success of our clients and team members. But most importantly, Nick is a model for our Center Values. Nick’s energy, enthusiasm, and commitment to the financial planning process for the benefit of our clients and the entire Center team is inspiring.”

A Bright Future

Over the firm’s 35 year history, Defenthaler is the tenth employee to advance to Partner. He is a role model for The Center’s mission and values. As we begin our 35th year in business, the partnership couldn’t come at a more exciting time.

Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™ and federally registered CFP (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.

Things to Consider if You are Anticipating an Inheritance

Contributed by: Sandra Adams, CFP®

If you are like most clients, anticipating an inheritance likely means that something is happening, or has happened, to someone you love. Often this means dealing with the complexities of grief and loss, in addition to the potential stress of additional financial opportunities and responsibilities. Combining your past money experience and your relationship with the person you are losing or have lost can cause varying degrees of stress.

Based on our experience with clients who expect to receive an inheritance, we offer a few suggestions that will serve you well and help you avoid some of the common pitfalls:

• Avoid making big plans to upgrade your home, buy the fancy car, or take the exotic trips. In other words, don’t spend the money before you have it.

• Don’t let others pressure you into quick decisions or coax you into making purchases or gifts that you wouldn’t normally make.

• Don’t make any big purchases until you have taken the time to do more purposeful planning.

• Take an intentional time-out from decision-making. Give yourself the ability to grieve, and to make sure your head is clear and ready to make smart financial decisions.

• In the planning process, determine what will change, or has changed, for you since receiving the inheritance (income, savings, investments, expenses, home, etc.); this information will help guide your financial planning decisions with the inherited funds.

• Identify your current and future financial goals, then plan so that inherited funds help you meet those goals.

Even if you have a financial plan and are an experienced investor, receiving an inheritance can throw you for a loop from an emotional standpoint – and from a planning standpoint – when you rush to make decisions. If you have no experience with money, receiving an inheritance can seem completely overwhelming and stressful. In either case, having a financial planner – a decision partner to provide assistance, guidance, and a sounding board – can be invaluable. If you expect, or know someone who expects, an inheritance and could use some guidance, please contact us for assistance (Sandy.Adams@CenterFinPlan.com). We are always happy to help!

Sandra Adams, CFP®, CeFT™, is a Partner and CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® She specializes in Elder Care Financial Planning and serves as a trusted source for national publications, including The Wall Street Journal, Research Magazine, and Journal of Financial Planning.

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Any opinions are those of Sandra D. Adams, CFP® and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™ and CFP® in the U.S.

Important Information for Tax Season 2019

Contributed by: Lauren Adams, CFA®, CFP®

As we prepare for tax season, we want to keep you apprised of when you can expect to receive your tax documentation from Raymond James.

2019 Form 1099 mailing schedule

• January 31 – Mailing of Form 1099-Q and Retirement Tax Packages

• February 15 – Mailing of original Form 1099s

• February 28 – Begin mailing delayed and amended Form 1099s

• March 15 – Final mailing of any remaining delayed original Form 1099s

Additional important information

Delayed Form 1099s

In an effort to capture delayed data on original Form 1099s, the IRS allows custodians (including Raymond James) to extend the mailing date until March 15, 2020, for clients who hold particular investments or who have had specific taxable events occur. Examples of delayed information include:

• Income reallocation related to mutual funds, real estate investment, unit investment, grantor and royalty trusts, as well as holding company depositary receipts

• Processing of original issue discount and mortgage-backed bonds

• Expected cost basis adjustments including, but not limited to, accounts holding certain types of fixed income securities and options

If you do have a delayed Form 1099, we may be able to generate a preliminary statement for you for informational purposes only, as the form is subject to change.

Amended Form 1099s

Even after delaying your Form 1099, please be aware that adjustments to your Form 1099 are still possible. Raymond James is required by the IRS to produce an amended Form 1099 if notice of such an adjustment is received after the original Form 1099 has been produced. There is no cutoff or deadline for amended Form 1099 statements. The following are some examples of reasons for amended Form 1099s:

• Income reallocation

• Adjustments to cost basis (due to the Economic Stabilization Act of 2008)

• Changes made by mutual fund companies related to foreign withholding

• Tax-exempt payments subject to alternative minimum tax

• Any portion of distributions derived from U.S. Treasury obligations

What can you do?

You should consider talking to your tax professional about whether it makes sense to file an extension with the IRS to give you additional time to file your tax return, particularly if you held any of the aforementioned securities during 2019.

If you receive an amended Form 1099 after you have already filed your tax return, you should consult with your tax professional about the requirements to re-file based on your individual tax circumstances. You can find additional information here.

As you complete your taxes for this year, a copy of your tax return is one of the most powerful financial planning information tools we have. Whenever possible, we request that you send a copy of your return to your financial planner, associate financial planner, or client service associate upon filing. Thank you for your assistance in providing this information, which enhances our services to you.

We hope you find this additional information helpful. Please call us if you have any questions or concerns about the upcoming tax season.

Lauren Adams, CFA®, CFP®, is a CERTIFIED FINANCIAL PLANNER™ professional and Director of Operations at Center for Financial Planning, Inc.® She leads back-office activities and manages the client service, marketing, finance, and human resources departments.

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Please note, changes in tax laws or regulations may occur at any time and could substantially impact your situation. Raymond James financial advisors do not render advice on tax or legal matters. You should discuss any tax or legal matters with the appropriate professional.

Investment Commentary: Fourth Quarter 2019

Contributed by: Angela Palacios, CFP®, AIF®

It’s a new decade, and there is much to discuss! We’d love to see you at our annual Economic and Investment Outlook event, happening Wednesday, February 5, from 11:30 a.m. to 1 p.m. We’ll review the past year and take a look at what to expect in 2020. Lunch will be provided. You can register here. If you are unable to attend, don’t worry! We’ll send a link to view the presentation afterward.

2019 in Review

Where’s the beef? 2019 will be remembered as the year of the meat alternative. Burger King introduced the “Impossible Whopper”. Fans raved that this meatless alternative tastes great (I’ll take their word for it). However, investors were not left wondering about the beef in the markets, as 2019 saw excellent returns for both bonds and stocks. 2019 was strong until early May, rallying from a 2018 Christmas Eve low over 25%. The old adage “sell in May and go away” would have worked for investors this year. Point-to-point, from early May to early October, the S&P 500 was down just under 2%. From October on, however, the markets rallied strongly through year-end. Here’s how they finished up for the year:

What spurred this strong rally?

The Federal Reserve Board (the Fed)

Interest rates were cut three times throughout 2019, with guidance from the Fed that future rate hikes were very unlikely, while inflation remained low. This was a complete turnaround from the Fed, increasing rates four times in 2018 to the point that the yield curve briefly inverted in early 2019. (The yield curve shows what interest bonds of the same credit quality with different maturity dates pay.) This meant that the yield on a 2-year U.S. Treasury bond was paying more interest than a 10-year Treasury bond. Since then, the yield curve has rapidly steepened as short-term interest rates moved back down. Cutting rates not only spurred bonds to a record year, but also provided a tailwind that lifted stock markets to higher levels. Remember the old saying “Don’t fight the Fed”? This means that when the Fed is reducing interest rates, markets tend to go up, and this year was no exception.

Trade wars

Markets have responded very favorably to the trade war de-escalation. China and the U.S agreed to the phase-one trade deal in December, removing significant unpredictability, at least in the near term. This agreement rolls back a portion of the existing tariffs and cancels the tariffs that were to be implemented on December 15, 2019. China also has committed to purchasing more agricultural products, goods, and services from the U.S. in the coming years. However, significant work remains to resolve the larger sticking points in the trade war. This will likely be a factor influencing market performance and volatility in the coming year.

Corporate Buybacks

Over the course of the business cycle, the contribution to equity returns from corporate share buybacks ebbs and flows. Companies frequently buy back their own shares with the firm’s profits. This will increase Earnings Per Share (EPS), because the company’s earnings are divided among fewer shares, and it becomes a way to potentially increase stock prices.

Post-recession, companies tend to have less expendable cash and tend to buy back fewer shares. Later in the business cycle, they become cash rich and are able to more heavily deploy funds. This business cycle is no exception. Share buybacks throughout 2018 and 2019 have been a contributor to growth in EPS for companies. The one time allowance of corporate funds repatriation at a lower tax rate (allowed by Trump’s tax reform) has, no doubt, boosted this a bit.

The chart below shows the growing percentage of share buy backs. Twenty-eight percent of corporate cash on hand was utilized for this in 2018 and 2019, versus only 21% in 2010. Also notable, is the growing pool of cash (total height of the bar each year) for S&P 500 companies.

Source: Bloomberg, Compustat, FactSet, Standard & Poor’s, J.P. Morgan Asset Management

Impeachment threatened to derail the 2019 stock market rally

The House of Representatives formally voted to Impeach President Trump in December, which the markets largely anticipated. Now, the House is preparing to send the Articles of Impeachment to the Senate and begin trial there. The Republican-controlled Senate is expected to acquit President Trump. If the vote goes as expected, it should not have an impact on markets. I see this as the most likely scenario.

What do we expect for 2020?

Election year

As 2020 ramps up, so will the political campaigns. The chart below looks at the S&P 500 performance during election years. The story is largely one of positive returns. In previous years, 6- and 12-month returns ahead of a presidential election have been positive almost 90% of the time.

Our economic indicators support moderate growth, and markets are playing out in a positive manner, but we are watching a few points of worry.

U.S.-Iran tensions increase

The markets took a hit during the first week of January, after a move by President Trump. In response to Iran’s latest threat, Trump targeted Iran’s top general Qasem Soleimani, ultimately killing him in a U.S. air strike. This marks a departure from the nonmilitary approach the president has taken with the rest of the world, and caused the markets to quickly pull back. We’ll be watching the escalation of this geopolitical risk. 

After studying markets during other overseas military conflicts, we see the stock market flare up at the beginning of each conflict, when uncertainty is at its greatest. Once a course of action is decided, markets tend to settle into a general growth pattern, if the overall economy remains strong. This holds true even if that action is U.S. military invasion, which may seem counter intuitive. During this tension, many investors chose bonds as their safe haven. Oil is expected to spike and put some upward pressure on inflation. However, the amount of oil we can supply ourselves could mute this impact.

Economic Highlights:

• Unemployment remains at 50 year lows at 3.5%.

• Inflation, as measured by the PCE Price Index, rose 1.6% over the year ending November 2019.

• Gross Domestic Product (GDP) rose 2.1% in the third quarter, exceeding expectations.

• Retail sales increased 3.3% year over year, with online sales leading the growth – signs of a healthy consumer.

• U.S. dollar strength continues, bolstered by low inflation and low interest rates.

Economic Lowlights:

• ISM Manufacturing Index declines to 48.1. Any reading below 50 indicates contraction and is a potential recessionary signal.

• Consumer Confidence Index softens from reaching all-time highs, leaving us to wonder whether the consumer will continue to buy goods and services at the same pace (which boosts GDP).

• While leading indicators softened in the fall, the most recent reading leveled off. A negative trend here can signal a coming recession, but this softening hasn’t yet pushed us into the camp of calling for recession.

2019 was a strong year for U.S. markets. We predict positive returns will continue, just not at the same pace we experienced last year. At this point, we don’t expect a recession this year, but companies will likely face challenges as the Trade War continues. The 2020 election will continue to be on our minds as a party change in the White House could bring new economic policies.

As we welcome the New Year, we don’t want to miss the opportunity to express our gratitude for the trust you place in us each and every day. Thank you! Have a wonderful 2020!

On behalf of everyone here at The Center,

Angela Palacios, CFP®, AIF®
Partner & Director of Investments

Angela Palacios, CFP®, AIF®, is a partner and Director of Investments at Center for Financial Planning, Inc.® She chairs The Center Investment Committee and pens a quarterly Investment Commentary.

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There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Past Performance does not guarantee future results.

One cannot invest directly in an index. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. The MSCI EAFE (Europe, Australasia, and Far East) is a free float-adjusted market capitalization index that is designed to measure developed market equity performance, excluding the United States & Canada. The EAFE consists of the country indices of 22 developed nations. The Russell 2000 Index measures the performance of the 2,000 smallest companies in the Russell 3000 Index, which represent approximately 8% of the total market capitalization of the Russell 3000 Index. The Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market.

The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete.

The SECURE Act: How it May Impact Your Retirement

Contributed by: Nick Defenthaler, CFP®

The Senate recently passed the Setting Every Community Up for Retirement Enhancement (SECURE) Act. It’s a significant change in legislation for most Americans in or preparing for retirement.  

The SECURE Act is the second notable financial planning-related law change in only three years! The first was in 2017 when the Tax Cuts and Jobs Act (TCJA) significantly changed our tax code. Fast forward to 2019, the SECURE Act became law on December 20th, adjusting rules related to retirement accounts. To see just one meaningful adjustment to our tax code or retirement plan rules every 10-15 years is typical; so to see a major tax code overhaul and the implementation of the SECURE Act, all in a matter of only three years, is unprecedented. 

Needless to say, these changes have certainly kept your Center team on its toes! The SECURE Act contains almost three dozen sections, but for most of you, there are only a few adjustments that could impact your financial plan. Let’s dive in!   

Inherited Retirement Accounts & the End of ‘Stretch’ Distributions   

The new legislation changes how non-spouse account beneficiaries must distribute assets from inherited retirement accounts (IRAs) by removing the so-called ‘stretch’ provision. Most IRA beneficiaries will now have to distribute their entire inherited retirement account within 10 years of the year of death of the owner.

Tell me more…

When a non-spouse beneficiary inherited a retirement account such as an IRA, an annual Required Minimum Distribution (RMD) was required. Typically we think of RMDs occurring in our 70s and beyond but they are also present in many cases for beneficiaries of retirement accounts. If the RMD is not met by year-end, there is a stiff, 50% penalty on any funds that were not distributed that were supposed to be. When a spouse inherits a retirement account, however, there were (and still are) favorable rules in place, that in many cases, do not force the widowed spouse to take annual RMDs. 

Beneficiaries of retirement accounts were allowed to 'stretch' distributions over their lifetime which meant that the IRS only required a small portion of the account to be distributed from the retirement account each and every year.  For those who did not necessarily “need” the inherited dollars to live off of, this was a highly beneficial attribute of an inherited retirement account. Remember, when distributions are made from Traditional, pre-tax retirement accounts, the funds are considered taxable income to the owner and can impact one’s tax bracket for the year. However, if the beneficiary was only taking out the minimum distribution required by the IRS, the beneficiary typically did not have to worry about being pushed into a much higher marginal tax bracket. 

For example:

A 100 year old could name her 2 year old great-great grandchild as the beneficiary on her IRA. When the 100 year old client died, the great-great grandchild could stretch RMDs over their lifetime – which would result in a very small taxable event for the child each year given their age. To put it mildly, the IRS was not a fan of this because it essentially allowed families to turn retirement accounts into a very powerful, multigenerational wealth preservation tool that generated very little tax revenue over an extended period of time. 

How do the new rules work?

Moving forward, the ‘stretch’ provision has been eliminated for non-spouse account beneficiaries. For those beneficiaries who inherit a retirement account from an account holder who passes away in 2020 and beyond, the new standard under the SECURE Act will be the ’10-Year Rule’.   

Under this 10-Year Rule, the entire IRA must be emptied by the end of the 10th year following the death of the original account owner. Unlike like previous law under the ‘stretch’ provision, there is no annual RMD, the beneficiary has full control over how much they distribute from the account. As you might suspect, this will now require a high level of strategic tax planning as a retirement account beneficiary.

Questions to ask:

Does it make sense to take distributions evenly over that 10-year time frame if income is projected to be the same for the foreseeable future? Is the beneficiary’s income dramatically lower in a particular year? If so, could it make sense to take a sizeable distribution from the IRA so the taxable income from the account is taxed at a lower rate than most other years? In my humble opinion, this makes working with a comprehensive financial planner even more critical for IRA beneficiaries given all of the moving parts clients will now have to navigate from a tax standpoint. 

Roth IRA/401k/403b Accounts

We haven’t talked much about it yet but Roth IRA/401k/403b accounts are also subject to the 10-year rule, however, distributions to beneficiaries are NOT taxable. For those inheriting Roth accounts, waiting until the last minute and liquidating the account in year 10 could actually be a very smart move to take full advantage of the tax-free growth aspect of a Roth account. 

What if I already have an inherited IRA that I’m taking lifetime, stretch distributions from?  

If you inherited a retirement account from someone who passed away in 2019 or before, you are grandfathered into using the ‘stretch’ provision. The new, 10-year rule will NOT apply to you. 

Who is exempt from the new 10 year distribution rule?

• Spousal beneficiaries

• Individuals who are not more than 10 years younger than the decedent

• Disabled or chronically ill beneficiaries

• Certain minor children (of the original account owners) but only until the child attains age 18 or 21, depending on the state of residence

• 501(c)(3) charitable organizations

Possible planning strategies to consider given the new 10-year distribution rule:

• Roth conversions during the original account owners life to reduce taxable IRA assets.

• Using pre-tax retirement accounts for spending needs to reduce taxable IRA assets in the original account owner’s estate.

• If charitably inclined, the original account owner should consider utilizing the Qualified Charitable Distribution (QCD) from their IRA or name their favorite charity as the beneficiary on the pre-tax retirement account (remember, charities do NOT pay any tax when they inherit these funds).

• If you have multiple beneficiaries, be strategic with who you name as the beneficiary of the various accounts you own (ex. Consider leaving pre-tax assets to a son who is in a low tax bracket but leave your Roth IRA to your daughter who is in a high bracket).   

Required Minimum Distributions Age Increase

Another major headline from the SECURE Act is moving the age one must begin taking Required Minimum Distributions (RMDs) from age 70 ½ to age 72.

This gives account owners an extra 18 months of tax-deferred growth if they don’t immediately need to tap into their retirement accounts.

Keep in mind, this new rule only applies to those who turn 70 ½ in 2020 or later. If you have already attained age 70 ½ and started taking RMDs, you are still required to do so under previous rules.

Although the age for RMDs is being pushed out a bit, the age at which IRA account owners can utilize the Qualified Charitable Distribution (QCD) strategy remains unchanged at age 70 ½. Given recent tax reform and its impact on charitable planning, we were happy to hear this news.   

Eliminates the age limit for making Traditional IRA contributions

The SECURE Act also lifts the age restriction on who can contribute to a Traditional IRA. Previously, once an individual reached age 70 ½, they were no longer able to contribute directly. This rule always puzzled me, because with Roth IRAs, anyone, regardless of age, could contribute to the account as along as he or she had earned income from working and was eligible to do so based on certain income limits. 

While we don’t foresee this affecting a large number of Center clients, it’s on our radar, especially as this rule relates to "back-door" Roth IRA conversions.   

In summary… 

As with any law change affecting personal financial planning, there are still areas we are staying on top of with continued IRS guidance (ex. A 10-year rule on retirement accounts that name a trust as a beneficiary).  We are committed to keeping you informed and up to speed on these changes.   

Our financial planning team looks forward to having individual conversations with you soon to explain how the SECURE Act will impact your own personal financial situation.  At our 2020 Economic & Investment Update Event in February, we will spend roughly 15 minutes on the SECURE Act and provide even further commentary beyond the detailed summary above. Be sure to sign up if you haven’t already. 

As always, please feel free to reach out to your advisor if you have specific questions. On behalf of the entire Center team, we wish you a very Happy New Year and look forward to helping guide you and your family through the ever changing financial landscape!   

Nick Defenthaler, CFP®, RICP®

Partner and CERTIFIED FINANCIAL PLANNER™ 

Nick Defenthaler, CFP®, RICP®, is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® He contributed to a PBS documentary on the importance of saving for retirement and has been a trusted source for national media outlets, including CNBC, MSN Money, Financial Planning Magazine, and OnWallStreet.com.

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The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person's situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional. Unless certain criteria are met, Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted. Additionally, each converted amount may be subject to its own five-year holding period. Converting a traditional IRA into a Roth IRA has tax implications. Investors should consult a tax advisor before deciding to do a conversion.