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Timely advice & commentary about investing, taxes, financial planning and more.


By Kimberly I. McCarthy, Esq. / June 24, 2020

There have been a lot of changes regarding Required Minimum Distributions (“RMDs”) in the past 6 months! For anyone that wants to hit the pause button on this chaotic state of affairs and get an RMD “do over”, June 23rd was a good day.

On Tuesday, June 23, 2020, the IRS released formal guidance expanding relief for participants in 401(k)/403(b) plans, IRAs, and their beneficiaries. Specifically, the new guidance extends existing relief backwards (to distributions taken as far back as 1/1/20); extends existing relief forward (by moving the deadline to “reverse” or “undo” an RMD from 7/15/20 to 8/31/20); and by providing a new category of relief (allowing inheritance beneficiaries to re-contribute their RMDs).

The landscape for 2020 RMDs – combining the SECURE Act, the CARES Act, and all of the IRS guidance to date - is explained in the following FAQs.

Q: Who has to take an RMD from their 401(k)/403(b)/IRA during 2020?
A: No one; RMDs are waived for 2020.

Q: Does that include first year RMDs?
A: Yes, first year RMDs (e.g. 2019 RMDs) for those who turned 70.5 during 2019 are waived for 2020. In addition, IRA owners who were younger than 70.5 on 12/31/19 are subject to the new SECURE Act rules: Their first year RMDs don’t start until age 72.

Q: Does that include RMDs for inheritance beneficiaries?
A: Yes, all RMDs are waived for 2020, so beneficiaries who inherited IRAs or 401(k)/403(b) plan accounts are also exempt from RMDs for 2020.

Q: If I choose not to take an RMD this year, do I have to take 2 RMDs next year?
A: No. RMDs are waived for 2020, not delayed. For inheritance beneficiaries, if the new 10-year payout rules apply, the beneficiary will still receive the full 10 years starting next year: 2020 will not count against them.

Q: What if I took some or all of my 2020 RMD already? Can I “undo” the distribution and put the money back?
A: Yes! There is relief for any 2020 RMD distribution made on or after 1/1/20 that is corrected by 8/31/20.

Anyone can put their RMD back into the IRA/401(k)/403(b) from which it was taken, as long as it is done by 08/31/20. Note: this includes inheritance beneficiaries, even though rollovers and contributions to inherited IRAs are generally prohibited.

In addition, plan participants/IRA owners (but not inheritance beneficiaries) can “roll over” RMDs they have taken during 2020 into any tax-deferred account IF the rollover rules apply AND the roll over is completed by 08/31/20.

Q: Is the CARES Act relief all-or-nothing, or can I take/return some (but not all) of my RMD?
A: It is not an all-or nothing proposition. You can elect to take none, some, or all of your 2020 RMD, and you can elect to return none/some/ or all of your 2020 RMD.

Q: What if I made a qualified charitable distribution (a “QCD”). Can I undo that?
A: Generally, no. A QCD is a charitable donation, and charitable gifts are irrevocable and cannot be unilaterally unwound.

Q: If I took my entire 2020 RMD, does the CARES Act relief provide for additional IRA withdrawals tax-free?
A: No. There is some additional retirement plan relief – like a waiver of the 10% early withdrawal penalty for coronavirus distributions and expanded plan loan provisions – but not additional tax-free IRA distributions.

If you have any questions, please contact Washington Trust Wealth Management at 800-582-1076 or by email at info@washtrustwealth.com.

This overview provides general information based on currently available data and takes into account the IRS’ guidance to date. All material has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. This FAQ does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. Please consult with a financial advisor, attorney or tax professional regarding your specific investment, legal or tax situation as this is not intended as legal or tax advice.


By Matthew S. Blank, CFA® / April 20, 2020

Economic forecasts for 2020 have been upended as public health concerns prompted the shutdown of large parts of the U.S. economy in order to prevent rapid transmission of COVID-19. 2019 had concluded on a very healthy note as GDP grew at a 2.1% pace in the final quarter and 2.3% for the year.1 A continuation of moderate growth seemed probable in 2020. If you recall, January and February economic data were solid, characterized by strong employment and a robust housing sector.

By late March, however, it was apparent the stay-at-home orders instituted throughout most of the country had triggered a deep recession. In just the last two weeks of the month, nearly 10 million workers had filed for unemployment insurance and even deeper job losses are likely on the way, underscoring the deterioration of a once vibrant labor market.2 The official unemployment rate which had been hovering around 50-year-lows had jumped from 0.9% in March to 4.4%.3 Estimates now call for unemployment to potentially peak anywhere from the mid-teens to 30% by late spring.4

GDP growth will plummet as well. It is now presumed that Q1 GDP has dropped from low to mid-single digits, and that second quarter GDP is likely to contract 15% or more5. Across the world, governments are deliberately creating a recession to deal with the coronavirus. These dire U.S. numbers are mirrored globally, although East Asia is showing some resilience, which is a hopeful sign. This region, having been the first to experience the coronavirus, is likely to be the first to emerge from the pandemic. The situation in poorer emerging markets, however, is especially worrisome.

The hope, of course, is that while damage to the economy will be severe, it will be temporary. Governments and central banks around the globe have responded with massive programs to prevent the economy from going into freefall and appear to have succeeded. In the U.S., Congress approved a $2 trillion spending package, while the Federal Reserve cut the Fed Funds rate by 1.5% and resumed large scale asset purchases to support markets. It is estimated the total support for the economy could exceed $4 trillion.

COVID-19 will eventually run its course and many are questioning the shape and extent of the recovery. We expect a strong rebound towards the second half of this year, but it would be naïve to think that an all-clear will sound and things will snap back to prior levels in an instantaneous fashion. COVID-19 caseloads in a number of states may not peak until late May, while many businesses will never recover lost sales. A sharp recovery would seem unlikely before mid-summer. Medical concerns including availability of widespread testing and adequate supplies of equipment will also need to be resolved.

Unfortunately, it now appears the U.S. economy will likely experience negative growth for the full year, most probably in the low single digits. While the labor market should begin to heal quickly, a return to a 3.5% unemployment rate is likely to be years rather than months away. Capital spending which was already limping along prior to the COVID-19 outbreak will likely be even slower to recover. However, despite the current pain, our forecast is for a return to sustainable growth in 2021.6

U.S. financial markets largely ignored the pandemic over the first six or seven weeks of the year. Despite the carnage experienced in China, the S&P 500 Index hit a record high on February 19th. The burgeoning number of COVID-19 cases in Europe, however, quickly made clear that the relatively few cases in the U.S. would compound exponentially. The only means to slow the spread of the disease and prevent the healthcare system from being overwhelmed would be extreme “social distancing” which would entail significant economic disruption. Markets went into a tailspin.

Not only did the S&P 500 Index lose more than 30% from its February peak to its March 23rd low, credit markets also plummeted and were on the verge of seizing. The yield differential between high-yield bonds and Treasuries, which had fallen to a cycle low of 3.15% on January 13th, spiked to 11% by March 23rd.7 All the while, prices of Treasury securities were screaming higher in a flight to quality and as the Federal Reserve swiftly lowered the Fed Funds rate towards the zero lower bound. At one point, even the yield on the 30-year Treasury bond plunged below 1% for the first time ever, while the yield on the benchmark 10-year Treasury has fallen below 1% and remained there.

While the velocity of the market decline was remarkable, markets just as quickly recouped much of their losses. Describing the scope and scale of the Government response, particularly that of the Federal Reserve “as unprecedented” is an understatement. Federal Reserve officials have long boasted of having an arsenal of tools to address extreme economic and market turmoil. In addition to slashing interest rates, the Federal Reserve initiated massive asset purchases in nearly every corner of the debt market, including municipal securities, and, for the first time ever, junk bonds. Lending facilities were also established to provide liquidity to a range of borrowers. With the Federal Reserve serving as a backstop, market participants regained the fortitude to return to the fray.

As of April 10th, the S&P 500 year-to-date loss had been reduced to 13.1%, although declines were significantly larger for smaller capitalization shares. Taking a longer-term perspective, the benchmark has only shed 3.1% from a year ago.8 Investors may well be wondering if we just experienced the shortest bear market in history. However, fundamentals are dismal. When the year began, Washington Trust forecast a mid-single digit gain in 2020 S&P 500 earnings to $173 per share. We have now slashed our estimate to $122.50, which results in a rather lofty forward P/E ratio of nearly 23x.9

Investors are clearly looking beyond 2020. A strong earnings recovery in 2021 is probable, but a return to peak levels of 2018/2019 would seem too much of a stretch. The damage done to the economy is real and changes to consumer behavior could be longer lasting than some expect. COVID-19 may not be completely be vanquished until a vaccine is successfully introduced which some experts indicate is likely to take at least another year. As interest rates are likely to remain near current depressed levels for the foreseeable future, higher equity valuation is not unreasonable but, in our view, P/E’s above 19x or 20x are unlikely to be sustained over time.

While Treasury yields are likely to stay “lower for longer”, investors may be able to locate fixed income investment opportunities given the substantial widening of credit spreads. As the credit picture has grown cloudier, new challenges have emerged, but diligent investors may now be able to reap some rewards. For example, a two-year Treasury is yielding just 0.2%, but a AAA tax-exempt municipal security of similar maturity could yield 1.75% or better. With this type of yield differential, the muni bond could be a sensible choice for any account regardless of tax status. Corporate spreads have also widened materially. We would focus on higher-quality investments given economic uncertainty.

The current economic environment is unlike anything experienced in our lifetime. There is no definitive roadmap for the progression of the disease or financial markets. While there were no visible financial bubbles preceding this crisis, we now recognize the fragility of our consumer economy, filled with great abundance, when so many live paycheck to paycheck. The closest analog is the 1918 influenza pandemic which took the lives of 675,000 Americans (over 1/2% of the population) and 50 million people worldwide and tended to afflict those in their working prime. Interestingly, the stock market steadily rose over its course.

Nobel Laureate Robert Shiller has speculated on three explanations. The bigger story at the time was, of course, the end of World War I. Further, there was confidence in the banking system in large part due to the creation of the Federal Reserve five years earlier. Lastly, the general public was far less involved in the stock market, and prices of financial assets were of less consequence to society. Shiller concludes with a truism, “Predicting the stock market at a time like this is hard. To do so well, we would have to predict the direct effects on the economy of the COVID-19 pandemic, as well as all the real and psychological effects of the pandemic of financial anxiety.”10 To that we would only add that the U.S. emerged from the pandemic of 1918 to a decade of great prosperity. While the current situation is disheartening and history does not necessarily repeat, investors should continue to think long-term and construct portfolios accordingly.

For more information, contact your client services team or email us at info@washtrustwealth.com.

The views expressed here are those of Washington Trust Wealth Management and are subject to change based on market and other conditions. Investment recommendations and opinions expressed in these reports may change without prior notice. All material has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. Investing entails risk, including the possible loss of principal. Stock markets and investments in individual stocks are volatile and can decline significantly in response to issuer, market, economic, political, regulatory, geopolitical, and other conditions.
Investments in foreign markets through issuers or currencies can involve greater risk and volatility than U.S. investments because of adverse market, economic, political, regulatory, geopolitical, or other conditions. Emerging markets can have less market structure, depth, and regulatory oversight and greater political, social, and economic instability than developed markets. Fixed Income investments, including floating rate bonds, involve risks such as interest rate risk, credit risk and market risk, including the possible loss of principal. Interest rate risk is the risk that interest rates will rise, causing bond prices to fall. Past performance does not guarantee future results. The S&P 500 Index is an unmanaged index and is widely regarded as the standard for measuring large-cap U.S. stock-market performance. In addition, the S&P 500 Index cannot be invested in directly and does not reflect any fees, expenses or sales charges. Further, such index includes 400 industrial firms, 40 financial stocks, 40 utilities and 20 transportation stocks. The information we provide does not constitute investment or tax advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell any security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. Please consult with your Portfolio Manager, financial counselor, attorney or tax professional regarding your specific investment, legal or tax situation.

Sources:
1 Bureau of Economic Analysis
2 Bureau of Labor Statistics
3 Bureau of Labor Statistics
4 Bloomberg
5 Bloomberg
6 Washington Trust Wealth Management
7 Bloomberg
8 Bloomberg
9 Washington Trust Wealth Management
10 Robert J, Shiller, “The Two Pandemics”, Project Syndicate


By Kimberly I. McCarthy, Esq. / April 20, 2020

As you undoubtedly have heard, in light of COVID-19, Congress passed legislation at the end of March which (among other things) waived all RMDs for 2020. This waiver applies to traditional IRAs, Roth IRAs, inherited IRAs, and 401(k) plans.

You may not know that many people who took RMDs prior to the law’s enactment can “undo” their RMD and put those funds back into their retirement plan, if they wish. The IRS issued guidance last week expanding both the group eligible to take advantage of that opportunity and the timeframe to get it done. Now most individuals who took an RMD on or after 2/1/2020 can “undo” that RMD via a rollover.

As with all tax rules, there are exceptions: inherited IRA beneficiaries aren’t eligible, qualified charitable distributions generally can’t be “undone”, and some owners who took distributions in January still might qualify.

To learn more, or get assistance with “undoing” an RMD, contact your account team – we are here for you!


By Washington Trust / March 20, 2020
 

We understand that current market conditions have made many investors nervous. However, we encourage investors to stay focused on their long-term investment goals, as we anticipate that the financial markets will recover, as they have from virus outbreaks in the past. We recommend that you ensure your near-term cash needs are met and resist the temptation to make any major asset allocation changes as a result of current events.


By Washington Trust / March 16, 2020
 

By Washington Trust / March 9, 2020
 

As concerns regarding the spread of COVID-19 (coronavirus) mount and the financial markets react, the Washington Trust team is here to answer your questions and address your concerns. No one really knows the potential human and economic impact of COVID-19. The U.S. and global economies will surely suffer some negative impact in the near term; however, past experience suggests any damage to the economy and financial markets will be transitory.


SP_PP2020Jan.jpg
By Washington Trust / January 14, 2020

Perspectives & Planning

2019 was icing on the cake to a decade that began with trepidation coming out of the financial crisis and the Great Recession but proved to be extremely rewarding for U.S. investors. We are relatively positive on the 2020 outlook for financial markets and the economy but do not want to get carried away. We would not claim any foreknowledge as to how the 2020’s will unfold beyond the next six months to a year. As the great Yogi Berra said, “It’s tough to make predictions, especially about the future.”

The U.S. economy enters the New Year and new decade on solid ground. Despite fears of a slowdown in the summer, GDP advanced at a healthy rate of just over 2% in the second half of 20191. For the full year, the economy overcame a number of largely self-imposed hurdles and likely grew by 2.3%2, a pace not very different from the tax cut fueled 2.5% growth of 20181. The U.S. is now in the midst of a record long expansion approaching 11 years in duration over which time our economy and financial markets have outperformed that of our peers. For 2020, Washington Trust believes growth will decelerate modestly to 2%2.

A healthy consumer has been the driver of U.S. growth over the past five years and we expect this trend to continue with consumer spending likely to increase by 2.5% in 20202. The economy is at, or near full employment, and incomes are rising. Americans have also significantly increased their savings rate in recent years and with interest rates low, they not only have wherewithal to spend, but the ability to borrow and service their debt. As such, in addition to consumption, housing should continue to make progress over the year and residential investment will likely contribute measurably to GDP. Government spending and widening budget deficits will continue to provide stimulus, although not to the same extent as last year.

Not all areas of the economy are booming, however. Weakness in the industrial sector has persisted. The trade war has taken a toll on business confidence and capital spending has suffered. While the passage of the USMCA (NAFTA 2.0) by Congress and a de-escalation of trade tensions with China offer hope, there is little sign of an imminent turn. The ISM Manufacturing Index is at a multi-year low and the impact of the production halt on the 737 Max by Boeing is on a scale such that it alone could shave 0.2% alone from Q1 GDP5.

Manufacturing could improve as the year progresses and the 737 returns to production and to the air. Greater certainty on trade may also begin to reignite investment. Higher oil prices, which rose sharply in 2019, may revive spending in the oil patch. A softer dollar would help the competitive position of U.S. manufacturers and lessen the trade deficit as would stronger global growth which the IMF forecasts will rise to 3.2% from an estimated 3.0% last year3.

2019 was a great year for financial markets, particularly in the U.S. The S&P 500 Index surged 31.5% while the Bloomberg Barclays Aggregate Bond Index returned a stunning 8.7%3. It was a remarkable turnabout after a disastrous 2018 fourth quarter when the S&P 500 Index declined by 13.4% resulting in a 2018 4.4% full-year loss3. Interestingly, despite the dismal stock market performance, both 2018 economic and corporate earnings growth were superior to that of 2019. 2019 S&P 500 Index earnings edged higher by the low single digits in 20192 versus a 20% jump in 20184.

The gradual transition in Federal Reserve policy from tightening to easing over a six-month period beginning in late December of 2018 and apparently fueled the rally. Investors clearly are more comfortable with a slower ”Goldilocks” scenario than a rapidly growing economy that ultimately results in restrictive monetary policy. The steep decline in interest rates across the yield curve driven by three Federal Reserve rate cuts spurred investors to embrace additional risk in 2019. Not only did stocks rally, but corporate debt also generated mid-teens returns3.

We think the potential exists for U.S. markets to provide additional gains in 2020, although on a more modest scale. Equity market valuation is rather lofty with the S&P 500 Index trading at 18.7x our 2020 earnings estimate2, and Federal Reserve interest rate policy could well be on hold for the year. However, the Central Bank remains extremely accommodative and is pumping liquidity into the money market. More importantly, we believe that the Fed is operating under a new dovish paradigm and remains committed to supporting the expansion. The odds of a rate hike appear to be slim; if the Fed does make an interest rate move it will most likely lower rates. We think the probability of a 2020 recession is generally low as financial conditions are highly supportive of growth and believe the 2020 S&P 500 Index earnings will grow at a slightly faster 5% pace2, although past performance does not guarantee future results. Therefore, stocks may well sustain higher valuations and advance mid- to high-single digits, a pace in line with projected earnings growth.

We are also expecting more subdued but positive returns from the fixed income market. Structural factors, especially aging demographics and low or negative rates overseas, will continue to cap U.S. yields. While the short-end of the yield curve appears well anchored at the current level just over 1.5%, the yield curve could steepen a bit if economic optimism continues to improve. We currently forecast that the yield on the 10-year Treasury note will hold in a band of 1.5% to 2.25% over the course of the year2. The 10-year is now trading at a 1.9% yield or just above the midpoint of our target range. With corporate bonds having rallied so sharply in 2019, we do not expect much excess return in this sector. Overall, we suspect that low single digit returns are in store for fixed income investors.

After a decade of terrific equity returns, investors should not become complacent and remain mindful of downside risks. The recent flare-up in the Middle East is a case in point. Over the past decade, the S&P 500 Index’s 13.4% annualized return far surpassed other asset classes including international stocks. However, during the 2000’s, the S&P 500 Index declined 1% annualized while emerging markets compounded at almost 10%3. With returns having again diverged dramatically, this would seem to be an excellent time to review asset allocation with your portfolio manager. As our market guru Yogi Berra also pointed out, “The future isn’t what it used to be.”

Sources
(1) U.S. Bureau of Economic Analysis (BEA)
(2) Washington Trust Wealth Management
(3) Bloomberg;
(4) Factset
(5) Capital Economics
The views expressed here are those of Washington Trust Wealth Management and are subject to change based on market and other conditions. Investment recommendations and opinions expressed in these reports may change without prior notice. All material has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. Investing entails risk, including the possible loss of principal. Stock markets and investments in individual stocks are volatile and can decline significantly in response to issuer, market, economic, political, regulatory, geopolitical, and other conditions. Investments in foreign markets through issuers or currencies can involve greater risk and volatility than U.S. investments because of adverse market, economic, political, regulatory, geopolitical, or other conditions. Emerging markets can have less market structure, depth, and regulatory oversight and greater political, social, and economic instability than developed markets. Fixed Income investments, including floating rate bonds, involve risks such as interest rate risk, credit risk and market risk, including the possible loss of principal. Interest rate risk is the risk that interest rates will rise, causing bond prices to fall. Past performance does not guarantee future results. The S&P 500 Index is an unmanaged index and is widely regarded as the standard for measuring large-cap U.S. stock-market performance. In addition, the S&P 500 Index cannot be invested in directly and does not reflect any fees, expenses or sales charges. Further, such index includes 400 industrial firms, 40 financial stocks, 40 utilities and 20 transportation stocks. The information we provide does not constitute investment or tax advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell any security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. Please consult with a financial counselor, attorney or tax professional regarding your specific investment, legal or tax situation.


By Washington Trust / January 14, 2020

The SECURE Act has passed and the “Stretch IRA” is DOA. What do you need to do to protect your estate/wealth plan?

In a surprise move, the SECURE Act passed as part of the massive end-of-year spending bill that was required to avoid another government shutdown. While there are several positive provisions, Congress paid for the SECURE Act with a very substantial negative provision: eliminating the “stretch” for inherited IRAs and retirement accounts. For most beneficiaries other than surviving spouses, the new rules require that the entire IRA/retirement plan balance be paid out within 10 years.

The SECURE Act generally applies to any IRA holder/401(k) participant who dies after 12/31/19, so 2020 is the year to ensure your estate and wealth planning strategies still work.

Some things to consider and discuss with your advisor:

Including trust provisions as part of your beneficiary designation.
This is more important than ever. Even without the benefits of a “stretch”, avoiding a full payout within 10 years of death has special importance for older parents (whose children might be adults but still too young to inherit so much wealth) and those whose beneficiaries might have spending issues, substance-abuse issues, or special needs. Without the protection of a trust, creditors or a beneficiary’s spouse (or former spouse, in a divorce proceeding) could access inherited retirement funds.

Doing a post-SECURE Act beneficiary check (even if a trust already is named)
Even if you used a trusteed IRA or a trust as beneficiary of your IRA/retirement plan, it may well need updating. Many retirement plan beneficiary trusts were drafted as so-called “conduit” trusts because they automatically qualified for the “stretch”. Conduit trusts mandate that the RMD be passed out to trust beneficiaries each year. The only way to avoid passing out the entire IRA/retirement plan balance in 10 years is to pay the RMDs to an “accumulation trust”, which gives the trustee discretion to keep the RMDs in the trust. Of course, this means that the trust might pay tax on the RMDs at the trust level and at the trust rate, so clients need to discuss with their advisor the relative benefit of delaying payment against potential increase in income tax.

Re-examining Roth.
For folks early in their career/retirement planning, this is another factor to weigh in favor of Roth IRA and 401(k)s, since Roth IRAs and Roth 401(k)s have no lifetime RMDs, and inherited Roth RMDs may be exempt from income tax. Folks further down the path might re-examine Roth conversion strategies (including phased multi-year conversion plans), depending on the deferred capital gain and tax bracket.

Allocating more IRA assets to fund your philanthropic goals.
If retirement assets must be distributed out (and taxed) over 10 years rather than multiple lifetimes, you might want to increase the amount of your qualified charitable distributions (during lifetime) and the amount designated to charitable beneficiaries or your own donor advised fund (at death).

Getting married.
Many unmarried partners address their joint financial planning with their partners through contracts: e.g. joint ownership, a health care power of attorney, a will. Since anyone can be named as the beneficiary of an IRA or an retirement account, the contractual route has worked for planning with retirement plan assets. However, the SECURE Act adversely impacts an unmarried partner, who will be forced to take a 10-year payout in almost all cases, but exempts spousal beneficiaries. For the large numbers of people who have the majority of their wealth in qualified retirement plans, the negative provisions of the SECURE Act may be a sufficient inspiration for some to pop the question!

There will be more clarity around the SECURE Act as the provisions are analyzed and as guidance and regulations are released. What is clear now, however, is that it is important to review your existing wealth and estate plan – especially beneficiary designations - to make sure it still works post-SECURE Act.

For more information, click here to read our FAQs about the SECURE Act.


By Washington Trust / January 14, 2020

The SECURE Act made many sweeping and significant changes for retirement plans, including IRAs. With regard to IRAs, the major changes impact the IRA rules after age 70 and after death.

How does the SECURE Act impact my IRA during my lifetime?
The SECURE Act changed the rules regarding contributions and distributions during an owner’s lifetime.

How did the SECURE Act change the rules for contributions during my lifetime?
The SECURE Act eliminated the maximum age limitation for contributing to traditional IRAs. Before the SECURE Act, contributions were prohibited after age 70.5.

Does this benefit apply to all IRA owners?
Yes – it applies to all traditional IRA contributions on and after 12/31/2019.

Is there a catch?
There is an additional consideration if you plan to use qualified charitable distributions (QCDs). Qualified charitable distributions are certain IRA distributions that are paid directly to charitable organizations. If you meet the QCD requirements, up to $100,000 of your QCD can be excluded from your taxable income. However, that $100,000 maximum exclusion is reduced by any deductions you take for traditional IRA contributions made after age 70.5.

How did the SECURE Act change the rules for lifetime distributions?
In addition to the impact on QCDs, described above, the SECURE Act changed the so-called “required beginning date” from age 70.5 to 72.

What does that mean for me?
Generally, it means that IRA owners do not have to begin taking RMDs until age 72.

Does this benefit apply to all IRA owners?
No. The effective date of this provision is for traditional IRA owners that attain age 70.5 after 12/31/2019.

So what does that mean?
Traditional IRA owners that were born prior to July 1, 1949 remain governed by the old rules. They have to take their RMDs, and they cannot make contributions to their IRAs, even if they are under age 72.

How does the SECURE Act impact my IRA after my death?
The SECURE Act eliminates the so-called “stretch IRA” for most non-spouse beneficiaries. Instead, it requires that the full balance of the IRA be distributed within 10 years after your death, rather than over the lifetime of your beneficiary.

Does this new rule apply in all cases?
No – there are some exceptions to the 10-year rule, and there is an effective date rule that “grandfathers” in certain IRAs.

What are the general exceptions?
In general, the 10-year rule does not apply to:

  • your surviving spouse
  • your minor child (until he/she reaches majority)
  • certain disabled and chronically ill beneficiaries
  • a beneficiary who is not more than 10 years younger than the IRA owner

What are the “grandfather” rules?
Generally, the rules only apply to inherited IRAs where the owner dies after 12/31/2019. Therefore, inherited IRAs where the owner died before 12/31/2019 are governed by the old life expectancy rules.

Please note, however, that “grandfathering” only applies to the IRA owner’s designated beneficiary. When the original inheritance beneficiary dies, any beneficiary that she/he names for the inherited IRA will be governed by the SECURE Act 10-year payout rules, unless an exception applies.

This overview provides general information based on currently available data, since the IRS has not issued any final regulations or guidance to date. All material has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. This FAQ does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. Please consult with a financial advisor, attorney or tax professional regarding your specific investment, legal or tax situation as this is not intended as legal or tax advice.


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By Washington Trust / October 18, 2019

U.S. financial markets have soared year to date through September 30, 2019. Not only has the Standard & Poor's 500 Index (S&P 500 Index) surged 20%, but bond prices have also climbed with the Bloomberg Barclays Aggregate Bond Index advancing 8.5%1. Investors are struggling to ascertain the message of the markets. Does strength in stocks presage robust growth, or do plummeting interest rates, which caused bonds to rally, signal a sharp slowdown?

Economic growth has moderated in the United States. However, the outlook is still reasonably solid. The robust first-quarter GDP of 3.1%2 slowed to a more sustainable 2% in Q22. Based on available data the economy probably also grew near 2% in the most recent quarter, and we expect growth to hold close to this pace as 2019 concludes3.

We sense that recession risk is not especially elevated at this time, and while economic expansion should continue well into next year, recent data are mixed. The consumer appears to be in excellent shape with a robust labor market providing a solid foundation as unemployment in the U.S. sits at 3.5%, a 50-year low4. One of the better forward-looking indicators, initial unemployment claims, is near a historic low as well. Consumer spending is strong, but the consumer does not seem overextended, with the savings rate hovering around 8% and debt service quite manageable2.

While personal consumption has been healthy, the same cannot be said for the industrial sector. Capital spending surged after the passage of tax reform but quickly fizzled. Manufacturing appears to have been a casualty of friendly fire from the trade war. Tariffs have increased costs, particularly on intermediate goods thus far, and supply chains have been disrupted. Furthermore, the on-again/off-again nature of the negotiations and tariffs has created uncertainty. Consumer confidence may be holding near cycle highs, but CEO confidence has plummeted to the lowest level since the depth of the recession in early 2009. Problems at Boeing and the General Motors strike create further short-term pressures.

Weakness abroad is a significant factor in the industrial sector’s malaise. We are hard-pressed to find a major economy growing faster in 2019 than in 2018. Global growth will likely slow to 3.2% this year from 3.6% in 20186. With Germany on the cusp of a recession, Europe is a major cause for concern. We have not been particularly troubled by the potential impact of Brexit, but it does represent another incremental negative for a region struggling to grow 1%. China has long been regarded as the engine of global growth, but growth in that geography, while still impressive at around 6%, is slowing steadily with ripple effects felt globally.

Given the global slowdown, central banks have begun to respond. In the United States, the Federal Reserve has already implemented two quarter percent rate cuts, lowering federal funds to a range of 1.75% - 2.00%. Another quarter percent rate cut is likely before year-end, and further cuts are possible in 2020. Bond yields have fallen sharply as well, with the yield of the 10-year Treasury Note declining a full percentage point since year-end to 1.68%. The resulting drop in mortgage rates has resuscitated a moribund housing market. Residential construction should provide a substantial contribution to GDP growth in the coming quarters. U.S. new-vehicle sales have also perked up.

With the overnight Federal Funds rate higher than the 10-year Treasury yield, the yield curve has inverted; and this may be an indication that monetary policy remains too tight. The Federal Reserve is likely to continue reducing short term rates to ensure there is a positive slope across the maturity spectrum. Foreign central banks are also taking steps to provide economic stimulus. China has cut reserve requirements. The European Central Bank recently resumed asset purchases and will likely cut rates further. Likewise, for Japan. However, for central banks that have already implemented negative rates, policy options are relatively limited.

Aggressive policy measures are required to construct a more optimistic economic scenario. China is willing and able to apply a fiscal stimulus, and a large-scale program could have a global impact. There has also been a discussion of fiscal stimulus in Germany, which would be extremely welcome after years of fixation on balanced budgets. In the U.S., greater certainty on trade policy could unleash suppressed capital spending.

We remain relatively constructive on financial markets despite valuation concerns and worries over trade, the Mideast, and even impeachment. Investors are understandably jumpy, especially after the experience of 2018, when stocks were up 10% during the first nine months of the year, only to crater in Q4. Shares have rallied sharply this year to be sure, but the S&P 500 Index is up only 4% from a year ago while mid-cap and small-cap stocks are down. With earnings likely to grow in the mid-single digits, perhaps valuation is fair rather than extreme.

Furthermore, unlike a year ago, when the Federal Reserve was tightening every quarter like clockwork, the Fed is now easing to provide support to the economy. With the precipitous drop in interest rates, equities should be able to support higher valuations, and we now believe that the S&P 500 Index should potentially trade in a range of 15x-19x forward earnings. A year ago, with bond yields 1.5% higher, our valuation range was 14x-18x.

Bond investors, unfortunately, will need to get used to current levels. We believe that the yield of the 10-year Treasury will remain in a range of 1.25% - 1.75%. With bond yields paltry, investors will have to view bonds as a necessary diversifier in a balanced portfolio rather than a return generator. The dividend yield of the S&P 500 Index at 2.0% is once again higher than the yield of the 10-year Treasury note. Investors may wish to consider a higher allocation to dividend growth stocks to enhance income over time.

Sources: (1) Bloomberg; (2) U.S. Bureau of Economic Analysis (BEA); (3) Washington Trust Wealth Management (4) U.S. Bureau of Labor Statistics; (5) The Conference Board; and (6) International Monetary Fund (IMF)
The views expressed here are those of Washington Trust Wealth Management and are subject to change based on market and other conditions. Investment recommendations and opinions expressed in these reports may change without prior notice. All material has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. Investing entails risk, including the possible loss of principal. Stock markets and investments in individual stocks are volatile and can decline significantly in response to issuer, market, economic, political, regulatory, geopolitical, and other conditions.
Investments in foreign markets through issuers or currencies can involve greater risk and volatility than U.S. investments because of adverse market, economic, political, regulatory, geopolitical, or other conditions. Emerging markets can have less market structure, depth, and regulatory oversight and greater political, social, and economic instability than developed markets. Fixed Income investments, including floating rate bonds, involve risks such as interest rate risk, credit risk and market risk, including the possible loss of principal. Interest rate risk is the risk that interest rates will rise, causing bond prices to fall. Past performance does not guarantee future results. The S&P 500 Index is an unmanaged index and is widely regarded as the standard for measuring large-cap U.S. stock-market performance. In addition, the S&P 500 Index cannot be invested in directly and does not reflect any fees, expenses or sales charges. Further, such index includes 400 industrial firms, 40 financial stocks, 40 utilities and 20 transportation stocks. The information we provide does not constitute investment or tax advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell any security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. Please consult with a financial counselor, attorney or tax professional regarding your specific investment, legal or tax situation.


The opinions expressed in this blog are those of the author and may not reflect those of Washington Trust Wealth Management. The information in this report has been obtained from sources believed to be reliable, but its accuracy and completeness are not guaranteed. Any opinions expressed herein are subject to change at any time without notice. Any person relying upon this information shall be solely responsible for the consequences of such reliance. Performance is historical and does not guarantee future results.

Such information does not constitute legal or professional advice as all situations are unique and are based on individual facts and circumstances.

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