Presents...Who doesn't love to receive gifts? To: 2020, With love from: 2019
2019 capped off a pretty wild decade, which started with the recovery from the Great Recession, included European crises, Occupy movements, widespread unrest referred to as the Arab Spring, major developments in the War on Terror, new styles of leadership emerged in many countries, escalating natural disasters, and it ended with a tariff war. Yet despite all the challenges and angst, U.S. GDP/capita likely increased approximately 35% to $65k/person1 while China’s GDP/capita likely more than doubled to just over $10k/person2. U.S. stock market indexes increased quite nicely and commensurate with the increase in corporate earnings, in our estimation. Most people are left feeling grateful for the progress and a bit apprehensive about the future- which by the way seems to be how most people feel most of the time.
December 2019 did leave two big presents for us to start 2020. The first present is a sense of improving China trade relations. The U.S. initiated the tariff war, which had a dampening effect on U.S. businesses primarily located in regions of the U.S. which heavily supported President Trump. President Trump wants to be reelected, and China likes its position (in terms of stolen intellectual property) but is not on the most solid economic footing. So, we expect both sides will welcome an end to the tariff war and a return to squabbling about enforcement of agreed upon trade policies.
The second present is a major step forward in Brexit. In the summer of 2016, the U.K. announced the intent to exit the European Union. In late 2018, the U.K. was in tumult as it had to decide on the details of the Brexit plan, European banks continued to struggle, and the U.S. started a tariff war with China. The U.K. and Euro Zone play important roles in the global economy and their economic activity has been decelerating. A smooth Brexit would reduce uncertainty and probably improve economic outlooks there and abroad.
Stocking Stuffers include USMCA and the Secure Act
In a divided government, it’s interesting to see what meaningful legislation is passed into law. During the week leading up to Christmas, Congress and the President signed both the revised North American Free Trade Agreement (NAFTA), now called the United States-Mexico-Canada Agreement (USMCA), and the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019.
The trade agreement largely updated required regulations amongst the North American countries with regards to intellectual property protections, increased environment and labor regulations, and industry specific changes in the automotive and dairy industries. The SECURE Act has directly impacted retirement financial planning strategies through changes to laws concerning both employer retirement plans (401(k), 403(b), etc.) and Individual Retirement Accounts (IRAs). Predominantly, it has made improvements to employer retirement plan access, to account for longer life expectancies and for those individuals that are working until a later age and those who have fewer financial assets available to fund their retirement needs. At the same time, it has removed some valuable estate-planning strategies that have historically been available to higher-wealth individuals.
Summary of Major Provisions in the SECURE ACT
Required Minimum Distribution Age extended from 70 ½ to 72:
If you turn 70 ½ in the year 2020, or afterwards, you will not have to begin taking distributions from your IRA until you are 72.
If you were born before 7/1/1949, you turned 70 ½ in 2019 and must still follow the old law
IRA Contributions now allowed after age 70 ½ :
As long as you’re still working, you may now contribute to your IRA
You still have to take RMDs, at your appropriate RMD age, even if you are working
Inherited / Beneficiary IRAs for non-spouse beneficiaries (with some exceptions) can no longer use a “Stretch IRA” strategy to take distributions:
Whereas non-spousal beneficiaries of Inherited IRA’s could previously elect to take distributions over their expected lifetime, they must now distribute the entirety of the funds within a 10-year period.
This change does not affect any beneficiary IRAs already in place in 2019 or earlier.
Changes to Employer (401(k), 403(b), etc.) Plans:
Added financial incentives and legal protections to implement or upgrade employer retirement plans
Added the requirement to offer participation to more part-time workers
Allows better pooled / multiple-employer plans so that small businesses can join to share administrative costs and offer company retirement plans
If your small business doesn’t offer a retirement plan, it’s a great time to reconsider this benefit.
In conclusion, the markets received several presents this holiday season, which reduced uncertainty in the three main regions of the world: The U.S., Europe, and China. We expect this reduced uncertainty pulled some of the positive returns from 2020 into 2019, but we are still optimistic for a positive year for equity markets around the globe.
Redmond Asset Management, LLC January 2020