QCDs: A Charitably-Minded, Tax-Efficient Strategy

By Kevin T. Smith, CFP®, CTFA, CDFA™

In the Financial Services field we love to use acronyms. RMD (Required Minimum Distribution), YTM (Yield to Maturity), and AGI (Adjusted Gross Income) are common ones that you may have heard. However, if you are older than age 70 ½, have a Traditional IRA, and make charitable gifts annually, a QCD (Qualified Charitable Distribution) is a good acronym to know.


QCDs – A Brief Background
Individuals with monies in a Traditional IRA, who are older than 70 ½, draw their Required Minimum Distribution each year. These distributions are treated as taxable income and included in your AGI. However, since 2006, individuals have had the ability to direct these required distributions (up to $100,000) to a qualified charity of their choice and exclude the amount from their taxable income each year. This strategy is referred to as a Qualified Charitable Distribution.

However, even though you are making a charitable gift, you may not include this amount in your itemized deductions. In other words, you cannot “double dip.”

Why the Popularity Now?
With Congress passing the Tax Cuts and Jobs Act in late 2017, it doubled the standard deduction for individuals and joint filers ($12,000 in 2018 for individuals and $24,000 for married filing jointly). This significantly reduces the number of individuals who will be itemizing their deductions. For those taxpayers who were itemizing their charitable gifts and are now taking the standard deduction, the tax benefit of the charitable gift is lost.

This has created more popularity for the QCD from IRAs and may provide the following benefits:

  1. Satisfy some, or all, of your Required Minimum Distribution
  2. Reduce your taxable income which can potentially:
    • Reduce the amount of tax on your Social Security benefits
    • Reduce the costs of Medicare Part B and Part D premiums
    • Help you avoid exposure to the 3.8% net investment income tax
    • Allow you to qualify for certain tax credits that have income caps

Please note these additional QCD strategy items:

  1. The charity must be a qualified charity per IRS standards (it cannot be a private foundation or donor advised fund)
  2. The distribution must be made directly from your IRA trustee to the charity (check payable to the charity)
  3. The QCD can be accomplished with Inherited IRAs where the beneficiary receiving the distribution is older than 70 ½

If you have already satisfied your RMD for 2018, you can look to the 2019 tax year and beyond as Congress has made the ability to do a QCD permanent. If you have questions on whether the QCD from your IRA is a strategy that may benefit you, we recommend that you speak with your tax professional.

 

Short-Termism – Investors’ Returns

By Drew P. Wilson, CFA

This is the third in a series of posts about short-termism from FAM Value Fund Co-Manager Drew Wilson.

There are any number of reasons investors may find it difficult to achieve their financial goals. In some cases, unexpected and uncontrollable events can wreak havoc on a financial plan. But it is often an investor’s own actions that lead to the failure of meeting their objectives. There is a branch of science called Behavioral Finance dedicated to exploring how an individual’s propensities and predilections can short circuit rational investment decisions.

Unfortunately, in my opinion, there is a powerful gravitational pull that has fostered a short-term mindset with many investors. This force comes from academicians, practitioners, pundits, and the financial press who promote – wittingly or unwittingly – return-diminishing behaviors such as market-timing and performance-chasing.

How well does a short-term investment approach work? In my next post I’ll highlight a compelling research study that compares performance-chasing versus buy-and-hold behaviors. At FAM, we have a long-term approach; however, despite consistent results for buy-and-hold strategies, this research study exposes a challenge the investment industry faces. Stay tuned.

Please see Fenimore disclosure.

Short-Termism – Hurts the Economy

By Drew P. Wilson, CFA
Investment Research Analyst

There are many who believe that short-termism hinders the U.S. economy. On June 6, 2018, corporate titans Jamie Dimon (CEO of JPMorgan Chase & Co.) and Warren Buffett (famed investor and CEO of Berskshire Hathaway), wrote an op-ed in The Wall Street Journal highlighting the problem of short-termism:

“…Companies frequently hold back on technology spending, hiring, and research and development to meet quarterly earnings forecasts that may be affected by factors outside the company’s control, such as commodity-price fluctuations, stock-market volatility and even the weather.”

“…The pressure to meet short-term earnings estimates has contributed to the decline in the number of public companies in America over the past two decades. Short-term-oriented capital markets have discouraged companies with a longer-term view from going public at all, depriving the economy of innovation and opportunity…”[1]

Additionally, a McKinsey Global Institute study that focused on 2001 through 2014 shows that the economic costs can be material. Their research gleaned that firms with a long-term focus had materially higher revenues, earnings, profits, and market capitalizations at the end of this time compared to those who had a short-term view.[2]

Next time, I’ll discuss how short-termism can hamstring many investors’ returns.

[1] Source: The Wall Street Journal’s Opinion, By Jamie Dimon and Warren E. Buffett, June 6, 2018

[2] Source: McKinsey Global Institute, “Measuring the Economic Impact of Short-Termism,” February 2017

Please see Fenimore disclosure.

Short-Termism – Impacts Everyone

By Drew P. Wilson, CFA
Investment Research Analyst

Whether or not you are familiar with the term “short-termism,” it most likely affects you. In my opinion, short-termism is a vicious cycle that negatively affects both the economy and many investors’ returns. I believe that there is a natural tendency toward short-termism that is further influenced by the investment environment. I will address this in a future post.

To begin, though, let’s set the context for the problem with this definition from FCLT Global:
“Too many investors continue to seek returns on their strategies as quickly as possible. Companies are missing out on profitable investments for fear of missing quarterly earnings guidance. Corporate management significantly undervalues and underinvests in longer-term prospects. Savers are missing out on potential returns because stock markets are penalizing companies that make long-term investments. Society is missing out on long-term growth and innovation because of underinvestment.” *

Do you have a short- or long-term view?

* Source: FCLT Global, “A roadmap for focusing capital on the long term.” September 2016

Please see Fenimore disclosure.

FAM Funds’ Annual Shareholder Informational Meeting Webcast

The event was held on October 9, 2018. 

  • Look at the past 10 years and discover how time in the market, not market timing, can make a big difference
  • See how our funds performed
  • Watch an insightful Q&A session with our Investment Research Team

 

Please see Fenimore disclosure.

What’s Happening in the Stock Market?

We believe there are two key reasons for the recent stock market decline. First of all, there is a small decrease in earnings power. Secondly, company valuations have decreased.*

1. Earnings Power Decrease – In some industries, corporate earnings are not coming in as strong as expected. This is the case with industrials, banking, and some technology companies. These stocks are declining as investors seem to be re-evaluating the earnings power of the underlying businesses. We think that there are many reasons earnings are less than expected.

For example, management teams are citing increased raw material costs, higher wages, and growing transportation expenses. Some of this is caused by tariffs, such as steel, and some by natural market forces in an expanding economy including labor and transportation. These increasing costs are reducing profit margins.

Additionally, while America’s economy is very strong, in our opinion, we are hearing about a slowdown in China and Europe. Some of this is related to tariffs, but there are probably other factors at work.

2. Decreased Valuations – While investors seem to be re-evaluating the earnings power of businesses and there is a slowdown overseas, stocks were also trading at high valuations in our estimation. The stock market has enjoyed double-digit returns for several years as the earnings power of corporations increased and the multiple of earnings that investors were willing to pay also increased. Given the uncertainty on earnings growth, investors appear to be no longer willing to pay those high price-to-earnings multiples.

Due to a small decline in earnings power for some industries and companies, and a big decline in stock prices for many businesses, we are seeking to add to positions and invest in new, high-quality enterprises at a discount to our estimate of their intrinsic value. For more than four decades, Fenimore has seen stock market downturns as opportunities to strengthen portfolios and build wealth over the long term.

*FactSet & Bloomberg financial data systems. Data as of 10/23/18.

Please see Fenimore disclosure.