Bob’s Journal for 3/4/21

Tips Retirees Need for 2020 Tax Returns

Many retirees and people who took COVID-related retirement plan distributions might need some extra time to work through their 2020 tax returns.

Those who took distributions from traditional IRAs at any point during 2020 will receive a Form 1099-R reporting the distributions to them and the Internal Revenue Service (IRS). You might need to take extra steps to avoid overpaying taxes.

Many retirees don’t realize that the 1099-R doesn’t have all the details about the year’s distributions. Remember that the CARES Act enacted in March 2020 waived required minimum distributions (RMDs) for 2020.

Later in the year the IRS ruled that taxpayers who had already taken their RMDs could return them to the IRAs (or other qualified retirement plans) tax free, even if they missed the usual 60-day deadline, as long as the rollover was done by Aug. 31. But if you took an RMD and returned it to an IRA, this won’t be fully reflected in the 1099-R. Instead, the form will list the gross amount of the distributions and say the total is fully taxable (unless you have some after-tax contributions in the IRA).

To correctly report the distribution and rollover on Form 1040, the retiree must include the full amount of the distributions on line 4a. If the entire amount was rolled over, or returned, to the IRA, put zero on line 4b as the taxable amount. Also, enter “rollover” next to line 4a. If less than the entire amount was returned to the IRA, enter the amount that was not rolled over on line 4b as the taxable amount.

The CARES Act also allowed special coronavirus distributions from IRAs and 401(k)s for those affected by the coronavirus.

The law allowed penalty-free distributions before age 59½ of up to $100,000 and also permitted the taxes on the distributions to be spread equally over three years. Alternatively, a taxpayer could avoid taxes by contributing the amount of the distribution to the same or another qualified retirement plan within three years.

Those who took such distributions will receive a 1099-R reporting a normal, taxable distribution.

To avoid the penalty and taxes on a coronavirus-related distribution, you must include with your tax return Form 8915-E. The form provides the relief from the early distribution penalty.

The form also lets you check a box to elect out of the option to spread the taxes over three years. You might want to pay all the taxes with your 2020 tax return if you were in a low tax bracket for the year and anticipate being in higher brackets in the next three years.

If you want to pay the taxes over three years, the form provides the computation for that. If you elect to return the money to a qualified retirement plan within the next three years, you would report that by also filing Form 8915-E in any year when the money is returned to a qualified retirement plan.

The Fed Accelerates Work on a Digital Dollar

The popularity of Bitcoin and other digital currencies is causing the Federal Reserve to work faster to establish a digital dollar.

Bitcoin has generated a lot of attention as an investment. In addition, MasterCard and BNYMellon recently announced they would provide support for digital currencies in their businesses.

Also spurring the change are China’s advancements in digitizing its own currency. China already is testing a digital currency in several of its cities and established trials with several neighboring countries using its digital currency as a payment method.

The Fed announced its plans in a report issued by its staff on the preconditions required for a central bank digital currency. Fed Chairman Jerome Powell also told a congressional committee that establishing a digital dollar is a “high priority project.” Treasury Secretary Janet Yellen voiced support for a digital dollar last week.

The digital dollar would not be a new currency. Instead, it would be a way for people and businesses to transact in the official U.S. currency entirely online, perhaps by using the blockchain technology that is the foundation of Bitcoin or perhaps through other secure forms of technology.

While China already is testing its digital currency, the Fed has no target date for rolling out a program. The staff report said a lot of technology hurdles need to be met before a digital dollar can be implemented.

The Stock Action Isn’t All in the Markets

The public stock market data aren’t telling us all that we think they are.

Over the last decade or so, a large portion of U.S. trades in stocks have moved off the markets to what some observers call “dark markets,” and the trend accelerated in the last year.

About 47% of U.S. stock-trading volume in January was executed outside of public stock exchanges, according to Rosenblatt Securities. A year earlier, the percentage was only 39.9%, and it had been below 40% for years.

On some days since last November, more than half of trading occurred outside of the public exchanges, according to Rosenblatt Securities.

Two factors accelerated the trend to off-market investing.

One factor is the growth of electronic trading firms, with the two largest being Citadel Securities and Virtu Financial. Brokers send trade orders for their customers to these firms instead of the stock exchanges. Most of the orders sent to the firms are small investors’ orders, especially those made using the zero-commission trading apps.

The other factor is the growth of individual investors with relatively small accounts using trading apps. That trend accelerated during the pandemic as more people stayed home and apparently spent part of their time following and trading stocks and options.

The electronic trading firms are believed to give investors better prices than they would receive if the orders were routed through one of the public exchanges. The electronic trading firms do enough business that they can execute most of the trades between the customers whose orders they’ve been given without having to go through the exchanges.

The electronic trading firms pay the brokers and trading app companies for the right to trade against the customer orders before executing them.

The electronic trading firms don’t publish the prices at which they execute trades. This concerns some observers who say that makes the markets less transparent and makes the publicly posted prices of the exchanges less reliable as a means of gauging true supply and demand for a stock.

Other observers say that even at the recent levels, there isn’t enough off-exchange trading to affect market transparency and reliability.

Some recent studies discovered that the off-exchange activity is hurting larger investors, such as pension funds. They have to trade on public exchanges because the electronic trading firms often can’t handle the volume of their trades. The public markets now don’t have the level of liquidity as in the past.

That can cause a greater move in a stock’s price when a pension fund buys or sells a large amount of a stock. One study reported by The Wall Street Journal found that trades by institutional investors are more costly to them when there are a smaller number of individual investors in the public markets for that stock.

At this point, it appears that the use of private exchanges helps the small retail investor but hurts larger investors, such as pension funds.

The Data

New unemployment claims increased by 9,000 to 745,000. But economists were expecting a larger increase.

Continuing claims decreased by 124,000 to 4.3 million. That’s another low since the pandemic first caused the spike in unemployment.

The number of people receiving some form of unemployment benefits declined by more than one million but remains above 18 million.

Private payrolls increased only 117,000 in February, according to the ADP Employment Report. This was a decline from January’s gains, which were revised higher to 195,000 from the 174,000 initially reported.

All the job gains were in the services sector. The industries with the highest increases in payrolls were trade, transportation and utilities.

Factory Orders increased again in January, this time by 2.6%. That’s the ninth consecutive month of increases.

For the manufacturing sector, orders increased 1.9% for the month and 0.8% over 12 months. Excluding transportation, manufacturing orders increased 2.1% for January and 0.9% over 12 months.

The services sector is growing but climbed at a slower pace in February, according to the ISM Services Index. The index was reported at 55.3, compared to 58.7 in January.

January’s level was the highest since February 2019, but February’s level was the lowest in nine months. In February, the new orders component of the index declined to a nine-month low and the inflation component jumped to its highest level since September 2008.

The manufacturing sector continues to accelerate. The ISM Manufacturing Index rose to 60.8 in February from 58.7 in January. That’s a three-year high. The index might have increased more, but a global shortage of some semiconductor chips reduced production at automobile plants.

The PMI Manufacturing Index for February was 58.6. The index hit 58.5 for its February mid-month flash reading and 59.2 at the end of January.

The PMI Composite Index for February increased, too. The composite index rose to 59.5, compared to 58.7 in January. The services component increased to 59.8 from 58.3 in January.

Personal Income soared by 10% in January, compared to a 0.6% increase in December. The January rise is the second largest since the government’s been reporting the data. The only larger increase was last April after the initial coronavirus stimulus measures kicked in.

In addition, consumer spending increased by 2.4% in January. That’s the first monthly jump in consumer spending since October.

The Personal Consumption Expenditure (PCE) Price Index, the Fed’s preferred measure of inflation, climbed 0.3% in January and 1.5% over 12 months. Excluding food and energy, the PCE Price Index increased by the same amounts for both periods.

Consumer Sentiment, as measured by the University of Michigan, increased a little to 76.8 in the final measure for February. That’s a jump from the mid-February reading of 76.2.

But the final February reading is less than the final January reading of 79.0. Twelve months ago, the measure was above 100.

In the latest Consumer Sentiment survey, there were declines in sentiment regarding both current economic conditions and consumer expectations. The largest decline was in expectations. But all of the declines in sentiment were concentrated in households with incomes below $75,000.

The Chicago Purchasing Managers Index (PMI) declined in February to 59.5 from 63.8 in January. The PMI had been above 60 for five consecutive months. Any level above 50 indicates growth.

The Markets

The S&P 500 lost 2.64% for the week ended with Wednesday’s close. The Dow Jones Industrial Average declined 2.05%. The Russell 2000 fell 3.38%. The All-Country World Index (excluding U.S. stocks) retreated 1.94%. Emerging market equities dropped 2.17%.

Long-term treasuries lost 0.80% for the week. Investment-grade bonds fell 1.04%. Treasury Inflation-Protected Securities (TIPS) declined 0.18%. High-yield bonds dropped 0.61%.

In the currency arena, the U.S. dollar rose 1.07%.

Energy-based commodities lost 3.21%. Broader-based commodities and gold each fell 3.95%.

Bob’s News & Updates

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