CAPITAL IDEAS: IRS lets you save on taxes

I also think that the pullback does double in size, but I’m not smart enough to time the starts and stops of corrections, so I tend to use them as opportunities to get more aggressive by reducing hedges, or getting cash invested, as opposed to selling investments.

(Note: The following is only important to you if you had to take a required minimum distribution, or RMD, in 2020. If that’s not you, save yourself 70 seconds and skip this first section).

Dalton — My April 8, 2020, column shared with readers some actions they could take to benefit from the CARES Act. Today, let’s revisit an update to the Act. The information in that column included:

  • Required minimum distributions are waived in 2020. If you’ve already taken RMDs this year, under certain conditions, you can return it.

Today let’s look at an update to the CARES Act. On June 23, the IRS updated release Notice 2020-51. Like most (all?) IRS notices, it can be difficult to understand, so I’ll do my best to simplify it for you. But first, a bit of context to make it more understandable.

In response to the global pandemic, Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act in March 2020. (By the way, does anybody know if there is one person whose job it is to make sure the initials of the acts by Congress always spell out something cool?). Among the provisions of the CARES Act was the suspension of RMDs from defined contribution retirement plans such as IRAs, 401(k)s and 403(b)s during 2020. Depending on the size of your plan and your tax rate, taking advantage of this provision could save you thousands — even tens of thousands — of dollars in taxes.

The problem was that the CARES Act wasn’t passed until March 27, so some people had already taken their RMDs. That was OK if you had taken your RMD on or after Feb. 1, 2020, because you were allowed to return it (per IRS Notice 2020-23). However, if you took your RMD in January and tried to return it, then you would have been in violation of what’s known as the 60-day rollover window and you would not be able to enjoy the tax benefit.

But now, according to Notice 2020-51, the IRS has allowed those who took distributions in January, including those that were taken by beneficiaries, to participate in this tax-saving strategy. Also, the 60-day rollover period for any RMDs taken this year has been extended to Aug. 31, 2020, to give taxpayers a little more time to utilize this opportunity.

I’ve made it a point to keep this simple, at least simple relative to the language of the IRS, so some important nuance for your particular situation may have been omitted. Let me give you a legal disclaimer that just so happens to be good advice: Talk to your financial advisor about how you can save on taxes by returning and/or waving your 2020 RMD.

I ain’t ‘scurred’

As I am writing, the S&P 500 stock market index is down about 7 percent, just shy of my call for an 8 to 16 percent pullback. Whether this pullback drops a bit more or doubles in size is probably less important than the bigger question: If you are invested, should you remain invested? I think you should. I also think that the pullback does double in size, but I’m not smart enough to time the starts and stops of corrections, so I tend to use them as opportunities to get more aggressive by reducing hedges, or getting cash invested, as opposed to selling investments.

It’s important to note two things to clarify the “as opposed to selling investments” comment. First, a reiteration that I’m talking about what I do during corrections, even big ones. I tend not to flinch in the face of 10% pullbacks. I mean, I get hyperfocused and try to assess the probability of something bigger, but I don’t go into panic mode. Experiencing corrections is part of the cost of being in the stock market. That brings me to my second thing: A rising market can mask a lot of potentially troubled investments. If you have positions that are dropping further and faster than the overall market, I invite you to reassess whether you should still be holding them.

That’s what I do in a correction, which is typically defined as a drop in prices close to or less than 10 percent. But a 16 percent pullback? How could I possibly be comfortable with a 16 percent pullback?! Well, the quick answer is that I’m am not at all comfortable with that. But I ain’t scurred of it either. I am, however, deathly terrified of stock indices going back to the March 23 lows. The bad news is that, historically speaking, it would not be unreasonable to expect a retest of those March 23 lows. And you know I like to use history in trying to figure out what the stock market will do.

Of course, history doesn’t always help me get it 100 percent correct. On April 15, when the S&P 500 traded at 2,761-points, I wrote that I expected: “a challenge of the 2,936-level (of the S&P 500) that takes months, not weeks, to get above. If I sound pessimistic, keep in mind that I am being more optimistic than history would suggest.” It turns out that I should have been even more optimistic because it only took a little more than month to break above and (so far) stay above 2,936. But it’s entirely possible we could drop below that 2,936 level again before we (hopefully) permanently rise above it (which would make my guestimate of “months, not weeks” more accurate).

In that same column I offered that: “if the historical average became reality, that would mean the final low of this bear market would be made on August 7. That doesn’t mean it has to be a lower low — after all, the Fed just stepped in to try to defend us from a lower low.” If I am right, that means the correction has another month or so to go.

That would be painful, but the duration and the magnitude wouldn’t be out of the ordinary. However, I’m still not selling the equity positions I bought in the past couple of months, after the stock market dropped forty-some-odd percent. Why not? After all, based on history, I probably should. The drop in stock prices from the Feb. 19 high to its March 23 low is what I refer to as a “waterfall decline.” A waterfall decline is a sharp drop in stock prices over a month or two. Throughout the last century, there have been 13 waterfall declines before this most recent one. Typically what happens is that there is a relief rally on big volume (which happened this time), then the rally fades on lighter volume (again, which happened this time). In 12 of 13 of those waterfall declines, the stock market then retested its lows, the only exception being December 2018. Given the 2018 exception, we need to acknowledge that the historical expectation of a retest is more of a roadmap than a certainty. And I personally need to acknowledge that it’s imprudent (stupid?) for me to consider that it could be different this time (when it comes to the stock market and history, it is rarely “different this time”).

Let’s explore why I am choosing to be potentially imprudent. To best do that, we should consider why the markets corrected 40-some-odd percent earlier this year. First, we had little knowledge of what COVID-19 was: We were still figuring out its means of transmission and were unsure of its mortality rate. Second, we weren’t able to quantify how big the economic impact would be because we didn’t know how long the shutdowns would last. And third, we had no idea what the monetary and fiscal policy responses were going to be. The uncertainty in those areas now has some clarity.

We now know more about the coronavirus and, additionally, we are seeing progress on treatments and hospital preparedness. Albeit unevenly, businesses are beginning to reopen. And the monetary and fiscal policy response was rapid and huge. Based on that clarity and based on “bad” economic conditions becoming “less bad,” I continue to hold my equity positions.


Allen Harris, the author of ‘Build It, Sell It, Profit: Taking Care of Business Today to Get Top Dollar When You Retire,’ is a Certified Value Growth Advisor and Certified Exit Planning Advisor for business owners. He is the owner of Berkshire Money Management in Dalton, managing investments of more than $400 million. His forecasts and opinions are purely his own. None of the information presented here should be construed as individualized investment advice, an endorsement of Berkshire Money Management or a solicitation to become a client of Berkshire Money Management. Direct inquiries to