Investments: Iran; Warsh Holds Steady
This past week, the U.S. and Iran met to conclude the conflict and bring about restoring peace in the Middle East. The war, beginning in early March, ultimately lasted roughly three and a half months. The peace agreement was signed last Wednesday between President Trump and his Iranian counterpart. The deal consisted of lifting economic sanctions on Iranian oil and speeding up the process to reopen the Strait of Hormuz. Negotiations on more complicated issues, such as the future of Iran’s nuclear program, will take longer to resolve. Oil prices have come down significantly in response to the news, with current WTI and Brent crude prices in the mid-$70s. From their April highs, oil prices have now dropped around 30%. Gas prices have also declined after the agreement, with the national average price have fallen below $4 for the first time in months. Coinciding with the Iran negotiations, newly sworn-in Federal Reserve chairman Kevin Warsh had his first FOMC meeting at the helm. In a unanimous decision, rates were left unchanged. Unlike his recent predecessors, Warsh chose to give as little disclosure as possible into his personal views on where the economy was going and declined to offer specific rate projections. However, he did mention that the committee was both united and determined to bring inflation down. About half of the governors are now projecting higher rates by the end of this year. Inflation continued to rise in May, with CPI numbers coming in at 4.2%. This increase has primarily been driven by the spike in energy prices due to the war in Iran. With oil prices continuing to recede, inflationary pressures may begin to ease in the coming months. However, with employment steady, Warsh has made it clear that tackling inflation is the Fed’s primary goal. Without providing forward guidance, Warsh appears content to let incoming economic data dictate the path forward, leaving investors focused on whether cooling energy prices will be enough to slow inflation and eventually bring future rate cuts back to the table.
Sources: WSJ, Yahoo! Finance
Planning: Hybrid NUA & IRA Rollover for ESOPs
Employer Stock Ownership Plans, or ESOPs, can provide a unique tax planning opportunity when an employer’s stock is paid out through a lump-sum distribution. Many plan participants assume they can either roll the distribution over into an IRA or elect the Net Unrealized Appreciation (NUA) option on the company stock. However, these approaches are not mutually exclusive, as a hybrid option is available. Participants can elect to roll over a portion of the distribution into an IRA and defer taxes on those dollars while simultaneously electing NUA treatment on the remaining distribution. When electing NUA treatment, only the cost-basis of the shares elected are taxed at ordinary income rates, while the appreciated stock is eligible for long-term capital gain treatment when the shares are eventually sold. For participants with highly appreciated employer stock, combining a IRA rollover with an NUA option can create significant tax savings and flexibility in retirement. However, careful planning is essential, as this process can be highly complicated and must be executed with precision.
