The federal government has taken an array of steps to combat the coronavirus and provide some help with the economic toll quarantine measures have taken on Americans. The most significant is a new law passed by Congress last week, the Coronavirus Aid, Relief and Economic Security (CARES) Act of 2020. The bill is intended to help businesses, individuals, state and local governments, and the health care system deal with the impact of the virus, totaling an estimated $2 trillion in new spending.
We can’t hope to cover every provision of the gargantuan legislation in this update, but we do want to hit on the measures that will be most relevant to you. If you have specific questions about your financial situation and whether the CARES Act or other measures will affect your financial plan, please don’t hesitate to contact your wealth management team here at Adviser Investments or a trusted adviser, CPA or tax attorney.
Direct Payments to Taxpayers
The provision of the bill which has drawn most of the ink from headline writers is one that aims to put money directly into many Americans’ hands. Congress has authorized one-time payments of up to $1,200 per individual taxpayer, along with an additional $500 for each child under 17 they claim as a dependent.
“Up to” is, however, a key phrase. Taxpayers whose adjusted gross income (AGI) was less than a certain threshold will be entitled to the full benefit, with payment amounts gradually reduced at higher levels of income until they phase out altogether for higher earners.
The way it works is this: You total up the full payment your household would be entitled to if income was not a consideration. A married couple filing jointly, for example, starts at $2,400. For every $100 in income above the threshold, your payment is reduced by $5. See the table below for income thresholds for single, head of household and joint filers.
The money takes the form of an “advance refundable tax credit,” a refund on taxes to be paid in 2020, similar to measures passed by Congress in response to the 2001 and 2008 recessions. Since you haven’t paid your 2020 taxes yet, the IRS will be using your 2019 return to determine whether you’re eligible and for how much. If you haven’t filed for 2019 yet, the IRS will rely on your 2018 return instead.
The federal government has also extended tax filing deadlines until July 15, 2020. Any payments owed can be deferred from April 15, 2020, to July 15, 2020, without penalties and interest, regardless of amount. This deferment applies to all taxpayers, including individuals, businesses, trusts, estates and those who pay self-employment tax.
The extended filing deadline and the new advance credit may impact your tax strategy. If you’d be eligible for a payment based on your 2018 income but ineligible based on your 2019 income, you may wish to delay filing your 2019 return until after the payments are made—the CARES Act does not contain a provision to recoup any over-payment. If your 2019 income was below the threshold while your 2018 was above, consider filing as quickly as possible to receive the funds.
If you have specific questions about your financial situation and whether the CARES Act or other measures will affect your financial plan, please don’t hesitate to contact your wealth management team here at Adviser Investments or a trusted adviser, CPA or tax attorney.
If your 2019 income makes you ineligible or only partially eligible for a credit but your income has declined in 2020, any additional credit you’re now eligible for can reduce your tax liabilityLiabilities are calculated by adding up your existing debts (mortgage, car loans, student loans, credit cards, etc.). when you file your 2020 tax return next year. Even if you had no reportable income last year and didn’t file taxes, you may be eligible for a recovery rebate, so long as you have a social security number and are authorized to work in the United States.
Because the IRS is relying on information from prior returns to process the recovery rebate payments, you also should double-check that you can still access the account to which your most recent tax refund was deposited. If you didn’t file a return last year or didn’t have a refund direct deposited, the IRS plans to launch an online portal in the coming days allowing you to provide the information necessary to receive your payment.
Required Minimum Distributions Not Required in 2020
One provision of the CARES Act most likely to be relevant to current retirees is the waiver of required minimum distributionsA required minimum distribution is the amount of money that must be withdrawn each year from tax-deferred retirement accounts once the beneficiary reaches retirement age (72, according to IRS rules). (RMDs) for 2020. In short, any retiree who’d prefer not to withdraw money out of their retirement accounts in a down market (and who isn’t relying on RMDs to pay current expenses) doesn’t have to make a withdrawal.
The waiver applies to a broad range of retirement accounts, including traditional IRAs, SEP IRAs, SIMPLE IRAs, 401(k) plansA 401(k) plan is a retirement account that a company sets up on behalf of its employees. Both the participant and the employer can contribute to the account. There are two types of 401(k)s, traditional and Roth. Income invested in traditional 401(k)s isn’t taxed while it’s invested, but is taxed when it’s withdrawn. Income invested in a Roth 401(k) is taxed before it’s invested, but no tax is paid when it is withdrawn., 403(b) plans and government-sponsored 457(b) plans. Both plan owners and beneficiaries may elect to waive RMDs if they desire.
Any retiree who’d prefer not to withdraw money out of their retirement accounts in a down market (and who isn’t relying on RMDs to pay current expenses) doesn’t have to make a withdrawal.
One important wrinkle to note: The CARES Act applies to any RMDs that would have been taken in the year 2020. People who turned 70½ in 2019 had until April 1, 2020 to take their 2019 RMD—and if they hadn’t taken it yet, they may now waive both the 2019 RMDA required minimum distribution is the amount of money that must be withdrawn each year from tax-deferred retirement accounts once the beneficiary reaches retirement age (72, according to IRS rules). and the 2020 RMD due later this year if they so choose.
What happens if you’ve already taken your RMD for 2020, but would have preferred to waive it instead? The IRS’ most recent guidance provides that RMD distributions made between February 1 and May 15 can be “rolled back” into your IRAA type of account in which funds can be saved and invested without being subject to tax until the account holder reaches retirement age. by July 15. (Any distributions taken in January are not covered.) If you take your RMDs in monthly installments from an IRA, you can only deposit one such withdrawal back into an IRA.
Please also make sure to consult your accountant if you are paying quarterly estimated payments to the IRS to learn how waiving RMDs would impact your annual tax liability.
If you’re taking RMDs from an inherited retirement account, you may be out of luck, however. Beneficiaries are generally not eligible to roll RMD funds over. The rules for rolloversThe process of transferring funds from one retirement account to another, typically without incurring a tax. can be complex, however—it’s best to speak to a professional if you’d like to return RMD funds.
One final note on inherited retirement accounts—if a plan owner dies before they begin taking RMDs from a retirement account and the account passes to their estate, a charity or certain types of trusts, it must generally be wound down within five years. Under the CARES Act, 2020 is exempted from this requirement, giving heirs an extra year to close out the account. (This pausing of the clock does not apply to heirs subject to the 10-year wind-down provision of the SECURE Act passed in December, however.)
Tapping Into Retirement Accounts Without Penalty
In addition to direct payments, the CARES Act also allows individuals impacted by the virus to tap into their retirement accounts for extra cash without facing early withdrawal penalties. Up to $100,000 can be withdrawn in 2020 as part of these “Coronavirus-Related Distributions” from IRAs, employer-sponsored retirement plans or a combination of both. Events that qualify you for this type of distribution include:
Being diagnosed with COVID-19
Having a spouse or dependent diagnosed with COVID-19
Losing income as a result of being quarantined, furloughed, laid off or having work hours cut because of the disease
Being unable to work because of lack of childcare as a result of the disease
Owning a business that has closed or reduced opening hours because of the disease
Note that this is not a comprehensive list—the law gives the IRS the authority to add other circumstances that render your withdrawal eligible. Victims of natural disasters have been offered similar penalty-free withdrawal provisions, and the IRS has generally interpreted eligibility broadly.
In addition to being exempt from early-withdrawal penalties, any Coronavirus-Related Distribution from an employer-sponsored plan will be exempt from mandatory federal withholding requirements that rollovers are normally subject to. The tax on the distribution can be paid in full in 2020 or spread out over three years. You’ll have three years from the date of the distribution to pay back the funds if you choose, and any future income you use to top up your retirement accounts will be subject to the same tax benefits, though you may have to file an amended return to get any overages refunded.
In addition to simply withdrawing funds from your retirement accounts, many employer-sponsored retirement plans (e.g. 401(k)s and 403(b)s), allow participants to withdraw a portion of their retirement assets as a loan. If you’ve been impacted by the coronavirus, you can take out a loan of up to $100,000 (double the normal amount), and any repayments that would be due in 2020 can be delayed for up to one year.
Virus-Related Charitable Contributions
Congress has also used the new legislation to encourage taxpayers to donate to causes providing virus relief. The CARES Act contains a new $300 tax credit for any donations made to qualified charities. To be considered a qualified charitable contribution, donations must be made in cash, and cannot be used to fund either donor-advised funds (DAFs) or 509(a)(3) “supporting organizations.” This CARES Act deduction can only be claimed by taxpayers who don’t otherwise itemize deductions on their return.
If you typically itemize your taxes, you may be able to take advantage of another charitable giving provision contained in the bill: Restrictions on how much of your tax liability can be wiped out with cash contributions to charities have been waived for 2020. Give enough, and you can not only eliminate your 2020 taxes owed, but also carry deductions forward into future years. As above, cash donations to donor-advised funds or 509(a)(3)s are not eligible.
Health Care Provisions of Note to Retirees
The CARES Act contains many provisions meant to help the health care sector cope with the pandemic, and we don’t propose to cover them in full. But we should briefly note three items affecting those covered by Medicare:
Medicare beneficiaries will be eligible to receive the COVID-19 vaccine (when available) at no cost
Medicare Part D recipients may request a 90-day supply of prescription medication (up from 30)
Telehealth services may be temporarily covered, and the number of providers authorized to substitute telehealth services for in-person visits has been increased
Student Loan Relief
The CARES Act also suspends federal student loan payments and interest until September 30, 2020. Students eligible for loan forgiveness programs will still have the relevant months count towards their tally, and wage garnishments and other penalties for anyone behind on their loans will be suspended. Note, however, that while the new law means the federal government won’t penalize you for suspending payments, it also won’t stop you from making them. If your loan payments are automated, you’ll have to contact your loan servicer or bank to have them stopped. Any payments made will simply be applied to your loan’s principal.
And Much More
In addition to the issues mentioned above, the CARES Act includes substantial broadening of unemployment eligibility for those affected by the crisis, and numerous tax breaks and credits for small business owners and the self-employed.
We know we haven’t covered all the possible nuances of the government’s response contained in this massive bill, but we hope we’ve given you enough insight to gain a sense of how these measures may impact your finances, and what resources may be available to you. Please call your wealth management team here at Adviser Investments if you have more specific questions—we’re happy to do all we can to help you adjust your plans to changing rules and circumstances during this crisis.
Adviser Investments’ Virus Response Resources
This scale of this pandemic, and the global response to it, have been unprecedented in modern times. Simply trying to follow the news can be overwhelming. We here at Adviser Investments are working hard to help you cut through the clutter and keep up to date with solid information and reasoned analysis about the virus, its impact on your portfolio, and our own response, including
Today’s Market Takeaways—these one- to two-minute videos feature a member of our investment team with analysis of the market’s moves. Click here to see Monday’s Takeawaywith EquityThe amount of money that would be returned to shareholders if a company’s assets were sold off and all its debt repaid. Research Analyst Kate Austin giving some perspective on the recent rally.
In addition, all the resources we’ve gathered in response to the pandemic, including our podcasts, blog posts, special reports, videos and a letter from CEO Dan Silver can be found on our new Coronavirus Response homepage. Check back throughout the week to see our most recent insights.
Vanguard Throws in the Towel on Capital Value Fund
“Value” stocksA financial instrument giving the holder a proportion of the ownership and earnings of a company. underperformed for the decade-long bull marketA period during which stock prices rise significantly from recent lows for weeks, months or years. that came to a close last month. And now Vanguard’s given up on what you might call the poster child for value’s underperformance with the shuttering of its Capital Value fund.
On March 23, Vanguard announced that it would be “streamlining” its value fund lineup by folding the $770-million Capital Value fund into the $17.6-billion Windsor fund in mid-2020. The combined fund will keep the Windsor name and maintain its concentration on large and mid-cap value stocksA stock that is statistically cheap as a multiple of its earnings or book value, as compared to the overall stock market.. The merger is expected to be completed on July 24.
Vanguard’s given up on what you might call the poster child for value’s underperformance with the shuttering of its Capital Value fund.
As a refresher, value investing (a style that emphasizes paying less for something than the buyer thinks it is worth) has struggled to keep pace with growth investing (a strategy that banks on profit growth over asset values in determining a company’s worth) since the 2009 market bottom.
Wellington Management’s David Palmer will continue to manage about 70% of the combined fund, with the remaining 30% overseen by Pzena Investment Management. Palmer also had sole management responsibilities for Capital Value.
Windsor fund’s 0.30% management fee is not expected to change after the merger, and is comparable to Capital Value’s 0.29% expense ratio.
In a statement, Vanguard said that Capital Value shareholders would benefit from the move by gaining exposure to “two outstanding investment advisers managing the Windsor fund” and the “improved economies of scale.”
We’d guess that most shareholders aren’t complaining. While value stocks have been pretty inferior performers since the Great Recession, the Capital Value fund has had a particularly tough time. Investors have noticed. In February, the most recent month with available data, shareholders pulled $11.9 million out of the fund, compared with a $1.4-million flow into Windsor over the same period.
As the chart below illustrates, Palmer has struggled to keep pace with his benchmark, the Russell 3000 Value index. (The blue line falls when Capital Value underperforms the benchmark, and 1.0 means equal performance from each.)
As you can see, Capital Value has trailed both Palmer’s Russell 3000 Value index benchmark and Vanguard’s Total StockA financial instrument giving the holder a proportion of the ownership and earnings of a company. Market Index fund. While the Russell index is not investable, Total Stock Market Index is, and it charges just 0.14% in expenses, less than half of Capital Value’s 0.29%. Shareholders who have been paying attention (and it seems like many are, judging by the outflows) are likely feeling some buyers’ remorse after the long stretch of underperformance at a higher cost.
If you own Capital Value shares, come July you’ll be getting 70% of Palmer’s management instead of the full ride. Given the track record, maybe that change is good. Or maybe you should be looking elsewhere for the value fund in your diversified portfolio.
At Adviser Investments, we buy the manager, not the fund. We stand by our time-tested approach to investing in active managers with track records of strong risk-adjusted returns over full market cycles. And if that track record’s not there, sometimes an index fund can make sense.
About Adviser Investments
Adviser Investments operates as an independent, professional wealth management firm with expertise in Fidelity and Vanguard funds, actively managed mutual funds, ETFsA type of security which allows investors to indirectly invest in an underlying basket of financial instruments (these may include stocks, bonds, commodities or other types of instruments). Shares in an ETF are publicly traded on an exchange, and the price of an ETF’s shares will fluctuate throughout the trading day (traditional mutual funds trade only once a day). For example, one popular ETF tracks the companies in the S&P 500, so buying a share of the ETF gets an investor exposure to all 500 companies in the index., fixed-income investing, tactical strategies and financial planning. Our investment professionals focus on helping individual investors, trusts, foundations and institutions meet their investment goals. Our minimum account size is $350,000.
For the seventh consecutive year, Adviser Investments was named to Barron’s list of the top 100 independent financial advisers nationwide and its list of the top advisory firms in Massachusetts in 2019. We have also been recognized on the Financial Times 300 Top Registered Investment Advisers list in 2014, 2015, 2016, 2018 and 2019.
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Barron’s Top 100 Independent Wealth Advisors
The Barron’s Top 100 Independent Wealth Advisors rankings consider factors such as assets under management, revenue produced for the firm, and quality of practice as determined by Barron’s editors. The award sponsor has not disclosed how many firms were surveyed or considered for this recognition, nor the percentage of total participants that ultimately received recognition. For more information and a complete list of recipients visit https://www.barrons.com/articles/are-ria-firms-growing-too-fast-the-story-behind-the-trend-51568420132
Years Received: 2019, 2018, 2017, 2016, 2015 & 2014
Barron’s Top Advisor Rankings by State (Massachusetts)
The Barron’s Top Advisor Rankings by State (Massachusetts) (also referred to as Barron’s Top 1200 Financial Advisers) considers factors such as assets under management, revenue produced for the firm, regulatory record, quality of practice and philanthropic work. The award sponsor has not disclosed how many firms were surveyed or considered for this recognition, nor the percentage of total participants that ultimately received recognition. For more information and a complete list of recipients visit https://www.barrons.com/report/top-financial-advisors/1000/2019
Years Received: 2019, 2018, 2017, 2016, 2015 & 2014
Financial Times 300 Top Registered Investment Advisers
The Financial Times 300 Top Registered Investment Advisers is an independent listing produced annually by the Financial Times and Ignites Research. According to the Financial Times, in 2019, approximately 2000 firms were invited to be considered for its list; 740 responded with 300 being named to this list. The listing reflects each practice’s performance in six primary areas: Assets under management (70%–75% of a firm’s score), asset growth (15% of a firm’s score), years in existence, compliance record, credentials and online accessibility. For more information and a complete list of recipients visit https://www.ft.com/content/44d2b2b2-6cef-11e9-9ff9-8c855179f1c4
Years Received: 2019, 2018, 2016, 2015 & 2014
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