Jason P. Tank, CFA, CFP, EA

Use Your Get Out of Jail Free Card

July 3, 2020 by Jason P. Tank, CFA, CFP, EA

My grandma – yia-yia – used to pay me cold hard cash to learn a tiny bit of Greek. Beyond remembering just one swear word, the lasting impact of her lessons is my self-identification as being “half-Greek.” As a result, I rarely pass up the chance to quote Greek philosophers.

According to Heraclitus of Ephesus, change is the only constant. Case in point, this year’s waiver of your IRA’s required minimum distributions or RMD.

First, a little bit of background. Once you reach age 72, the government forces you to take money out of your IRA every year. The reason is simple; after you’ve enjoyed decades of untaxed gains, the government wants you to pay up, finally.

On March 27, tucked inside the massive piece of legislation known as the CARES Act, Congress suspended RMDs for just this year. This distribution hiatus applies to regular IRAs, 401(k)s, and inherited IRAs, too.

While it is unusual for Congress to waive RMDs, one was also granted in 2009 during the Great Financial Crisis. Notably, during that saga, the waiver was granted very late in 2008. This allowed for plenty of time to plan for the year ahead. We weren’t as lucky this time!

This year’s rule change created some interesting technical challenges for retirees. What could be done if you had already taken your RMDs before March 27th? What if you didn’t really need the money you took out? How do you actually undo it?

There’s a little known rule, referred to as the 60-day rollover rule, that allows people who took money out of their IRA to simply redeposit it. You are only allowed to use this tool once every 12 months. Using that rule seemed like a simple solution to undo an RMD done before March 27. Unfortunately, it really wasn’t.

Apparently unbeknownst to Congress, this 60-day rollover tool isn’t actually allowed for RMD distributions. It only applies to regular, non-RMD distributions. To further complicate matters, since the CARES Act became law on March 27, even incorrectly using the 60-day rollover rule still didn’t help those Johnny-on-the-spot retirees who took their RMD before January 27.

This confusing state of limbo is how things stood for about three months since the CARES Act had passed; until about a week ago.

Finally, on June 23, the IRS published a notice that says any RMDs can be returned to your IRA by August 31. And, the new guidance covers any distributions taken all the way back to the start of 2020.

Actually, it turns out that Heraclitus’ wisdom was not completely true. Change really isn’t the only constant. He forgot about the certainty of both death and taxes.

With this new get-out-of-jail-free card – which expires by August 31 – you may want to consider returning any unwanted RMDs. Deferring taxes for another year is a deal that’s likely too good to pass up. I’ll keep you posted on my work finding a way to defy death. Hint: Don’t hold your breath for too long!

Jason P. Tank, CFA is both the owner of Front Street Wealth Management, a purely fee-only advisory firm and the founder of the Money Series, a non-profit program committed to providing open-access to financial education, for all. Contact him at (231) 947-3775, by email at Jason@FrontStreet.com and at www.FrontStreet.com

Are We Different and Special?

June 19, 2020 by Jason P. Tank, CFA, CFP, EA

The questions greatly outnumber the answers. What do others know about containing the virus that we don’t? Do we know enough about the virus? Have we settled on a pragmatic policy of morbid acceptance? Are we being too cavalier?

Let’s briefly review the news from other parts of the world and compare them to stories here at home. Pay special attention to the number of new infections referenced below and the starkly contrasting policy responses. Since my professional focus is on money matters, how this all unfolds will have profound implications on financial markets.

May 19, The Guardian – Chinese authorities have sealed off the north-eastern city of Shulan, home to about 700,000 people, after an outbreak of coronavirus, imposing measures similar to those used in Wuhan. At least 34 people have been diagnosed with Covid-19 in Jilin province in the past fortnight.

June 13, Haaretz – “Statistics released Saturday evening by the Education Ministry show that 493 Israelis within the education system have tested positive…Thus far, 177 educational institutions have re-closed.”

June 18, The Guardian – “Beijing ordered all hotels be shut down, as well as restaurants in high-risk areas. On Thursday, Beijing reported 21 new cases of Covid-19…Schools have been closed, flights cancelled, and travel in and out of the city restricted.”

June 18, South Florida Sun Sentinel – “Florida saw a record-breaking 3,207 new coronavirus cases, shattering the previous high mark of infections this week…a trend where there have been at least 2,000 cases logged in five out of the past six days.”

June 18, CNBC – “Arizona health officials reported 2,519 confirmed cases on Thursday, surpassing the previous single-day high. South Carolina officials reported 987 new cases Thursday afternoon…marking another all-time high single-day increase. Texas reported 3,516 new cases Thursday evening, topping the previous record.”

As we now enter the summer months, investors are entirely focused on the economic reopening process. With each passing week, a collective complacency about the virus and its future impact has firmly taken hold in the US. This feels like a mistake.

Some major themes currently dominate financial markets today. Few expect to see any backward steps in the re-opening process. The shutdown is viewed as an overreaction and far too costly. A vaccine will arrive early next year. Game-changing treatments are coming soon. Stocks are viewed as the only game in town. And, finally, the Fed’s got our back. With all humility, each of these themes are worthy of healthy skepticism.

With at least 120,000 virus-related US deaths to date, it’s arguable that we’re only a few innings into this sad healthcare and financial saga. I personally hope that we can not only overcome our juvenile national attention span, but also regain our sense of common purpose.

As I survey the landscape and watch financial markets surprisingly recover, one burning question is quickly rising to the top of my own list of unknowns. Are we different and special?

A Disconnect Like Never Before

June 5, 2020 by Jason P. Tank, CFA, CFP, EA

The stock market is roaring back in the face of incredibly negative news of job losses, a deep recession and the specter of an uncertain economic recovery. Over the course of my career I have certainly seen moments of disconnect between the markets and the real economy. But, it’s safe to say that I’ve never seen as wide of a disconnect as I see today.

During a very short five-week period from mid-February to late March, the stock market cratered about 40% and bonds nosedived. Not only was there no place for investors to hide, there was almost no time to hide. Now, a little more than two months later, both stocks and bonds have profoundly rebounded. While the pace of the recovery cannot be overstated, the feeling of whiplash for investors cannot be understated.

Thanks to the unlimited backing of the Federal Reserve and Congress, Wall Street looks like it’s back, for now. But, let’s briefly review what’s happening on Main Street.

We have about 30 million people collecting “official” unemployment. While this figure changes from week to week, it’s important to note that a growing number of employees are also being added back to payrolls, even if they aren’t really back to work. Many of their paychecks are being covered through loans that will be forgiven if the business promises to act as a “shadow” unemployment system. Between the official and the shadow unemployment system, it’s probably safe to say that around 35 million to 40 million people who worked just a few short months ago are no longer working today. The combination of official and shadow unemployment represents a Great Depression-like 20% to 25% of the approximate 160 million people counted in the nation’s workforce.

As the economy’s reopening process unfolds, we should certainly expect many people to go back to work in some capacity. How many will head back is entirely dependent on the pace and path of the economic recovery. And, of course, much of that will be dictated by our collective approach to mitigating the spread of a novel virus that has no vaccine, limited therapies and no end date.

Adding to these uncertainties, as people do get called back to work, many face a cut in income as their official unemployment benefit currently exceeds their former paychecks. The funding source that provides for the extra $600 per week in unemployment benefits is slated to end on July 31. To complete the picture, our new shadow unemployment system’s funding source, provided through those forgivable small business loans, is also finite and temporary. The dual expiration and depletion of the official and shadow unemployment systems are an economic cliff eerily reminiscent of Thelma & Louise.

As Wall Street miraculously booms once again, Main Street’s position looks much more precarious. This disconnect was aptly illustrated by Senate Majority Leader Mitch McConnell’s recent declaration that their next piece of financial aid legislation will be their “fourth and final” bill. To put it bluntly, I very highly doubt it.

The Men and Women in the Arena

May 1, 2020 by Jason P. Tank, CFA, CFP, EA

In just over a month’s time the federal government has quilted together a complex patchwork of protection for millions of workers and business owners. Here’s just a portion of the growing highlight reel.

Economic Impact Checks: About 150 million checks from the government will be delivered or deposited soon. For those who qualify based on income, you’ll receive $1,200 plus another $500 for each child under 17.

There is a myth that these payments are only an advance or a loan against your tax refund next year. That is false. If you get a payment, it won’t affect your 2020 tax refund at all. However, if you made too much money in 2018 or 2019 to qualify for an immediate payment, but ultimately qualify based on this year’s income, you will receive your payment as a large tax credit next year.

Enhanced Unemployment Benefits: About 30 million people have already filed for unemployment benefits across the country. The filing process has been frustrating for many. However, it’ll be worth the wait as benefits are paid retroactively and they will be bigger than ever before.

To begin, the maximum regular unemployment benefit in Michigan is about $1,500 per month. This part lasts about 10 months. The federal government added on another flat amount of $2,400 per month. This additional part lasts until the end of July. In my view, there is a high likelihood it will be renewed. Importantly, for the first time, self-employed people who didn’t pay into the unemployment system are also entitled to receive benefits.

Paycheck Protection Program: Many millions of smaller businesses have filed to receive loans to help pay their employees over the next two months. Similar to the frustration felt by those filing for unemployment, this program has been equally cumbersome. The first wave of applications quickly depleted the program’s initial funding. Congress recently replenished it. The verdict is still out if it was enough to meet the demand.

If the loan is used for payroll costs and other qualified expenses, it will be fully or partially forgiven. Otherwise, it’ll just turn into a two-year loan at a very low interest rate. Of course, the loan forgiveness rules are confusing. It’s also important to note, to qualify for this loan you must certify that the money was “necessary” to support your business. The word “necessary” is already subject to a heated debate.

As time passes, we’ll no doubt witness the ramifications of this hastily constructed patchwork of financial support. The post-mortem analysis will be both politically and financially brutal. Until then, however, we should be reminded of Roosevelt’s famous quote, “It’s not the critic who counts; not the man who points out how the strong man stumbles, or where the doer of deeds could have done them better…the credit belongs to the man who is actually in the arena.”

I certainly do not envy the women and men standing in the arena today.

Beware of the Swinging Door

April 20, 2020 by Jason P. Tank, CFA, CFP, EA

Like prisoners etching their time served on their cell wall, my family has chosen our kitchen door jam to mark our social distancing efforts. Six weeks is approaching in just a couple of days. I must say, my long-held belief that April has only 30 days is faltering.

While I’m not an expert on the medical hurdles we’ll need to clear to safely “reopen” the economy, indications are that we’re still many weeks out. It may happen sooner, as a matter of choice, but it won’t necessarily mean we’ve satisfied the safety criteria. Regardless, it’s becoming clear to me our reopening will only feel moderately different than today. In fact, I’m expecting it to resemble a swinging door.

Unless you’ve successfully adopted the behavior of an ostrich by quickly stuffing your unopened March investment statements in a drawer, the stock market’s huge rebound might be a perfect moment to take a fresh look at your portfolio. Bear markets often provide investors a few short windows of opportunity to make long-neglected adjustments. Let your concern about your financial condition during the heart of last month’s decline be your guide to making possible changes now.

Financial markets have absorbed this Black Swan event with lightning speed. The market’s reaction has matched the trillions of dollars thrown out as a lifeline to businesses, households and investors. Right or wrong, policymakers’ vast power to save our financial system is seemingly unquestioned. However, the durability and sufficiency of these actions still remains an open question.

The unprecedented government support is likely not enough. Their solution has been a messy patchwork of enhanced unemployment benefits, forgivable loans to small businesses, cheap loans to larger businesses and small “stimulus” checks to millions of households. The money is just now arriving. Clearly, distributing vast sums of money is tough work. In a crisis, it never feels fast enough. The next phases of financial support that I expect to see in the months ahead will go much more smoothly. The templates of the various programs are being battle tested today.

With their programs, Congress and the Fed have helped to fill the immediate income and funding gaps at all levels. Nonetheless, they’ve realistically only bought the economy about two-to-four months of time. As we continue to grapple with the ongoing public health policy responses, we should expect negative follow-on impacts to the financial picture of hospitals, schools, municipalities and states. I anticipate a trifecta of program extensions, expansions and tweaks in the months ahead.

For a glimpse of our likely future, we should look to Singapore, Japan and South Korea. These countries have been held up as success stories for their ability to squelch their outbreaks. Now, after sustained periods of containment driven by advanced testing, tracking and tracing tools, each has reinitiated or extended their orders for their citizenry to isolate. Given this, even after we choose to reopen, we need to be aware of the swinging door. Otherwise, it just might hit us in the face.

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