All Americans were impacted when the government intentionally shut down our economy in hopes of protecting citizens by limiting the transfer of the Coronavirus Disease (“COVID-19”). As financial and health concerns continue to be on the forefront both nation and worldwide, the United States government passed three economic measures, in addition to other specific tax relief measures, to address the COVID-19 pandemic. For a summary of the key fiscal policy considerations and relief packages benefiting individuals and business owners, click here.
As we navigate through these choppy economic waters, Beacon Pointe also has several planning tips to help you through this temporary, yet tough time.
- Limit Spending Now Due to the significant market decline in recent weeks, now is a good time to reduce distributions from your investment portfolio. Withdrawals from a portfolio that has declined in value will compound losses and require a longer time frame to recover. Also, certain expenses will naturally be reduced or eliminated this year such as dining out costs and travel expenses. No matter how you limit your spending, now is a great time to do so.
- Emergency Fund Review It may be a good time to dip into that emergency fund if you have just lost a job or to reduce distributions from your portfolio. Consider using an alternative line of credit on your home to provide additional access to cash since interest rates are historically low and the extra liquidity will give your portfolio time to recover. You could also speak with your advisor about setting up a pledged asset line of credit, which pledges your portfolio and loans up to 70% of the value and may be preferred over margin at this time given the market volatility. Borrowing on margin will loan up to 50% of the value of your securities and has variable interest rates. If you are considering borrowing, it is worth speaking with your CPA to determine when interest is deductible and the differences of deductibility between a loan on your home and your portfolio.
- Required Minimum Distributions (RMDs) Waived, Distributions and Loans from Retirement Plans Those currently taking annual RMDs and those who turned 70 ½ in 2019 but deferred the first RMD to April 1, 2020, do not have to withdraw either the RMD amount deferred from last year nor an RMD for 2020. If you have already taken an RMD for this year and it was less than 60 days ago, and you have not already processed another 60-day rollover within the last 12 months, consider rolling the gross distribution amount back into your IRA as it will qualify as an indirect rollover. Alternatively, work with your CPA to contribute the same amount (including amount withheld for taxes) to a Roth IRA to effectively convert this amount, which will allow that amount to grow tax deferred. If you took an RMD after February 1, 2020 but wish to return it, you have until July 15th to roll it back into your IRA and have it still qualify as a 60 day rollover.
- Roth Conversions While the market value of securities declined recently, consider converting portions of your traditional IRA in-kind to a Roth IRA and pay tax on the (likely lower) value it is today. Know that you will pay tax this year on the amount converted (today’s value), but it might be a good year to do so if your income is lower than other years due to reduced hours, reduced business revenue, or unemployment income. Roth IRAs grow tax-deferred similarly to traditional IRAs, but distributions from Roth IRAs are income tax-free – even to heirs. Roth IRAs can be a great estate planning move as the taxes paid on conversion do not count as gifts from a gift tax perspective, and they reduce the size of your estate by the amount of taxes paid.
- Gift and Estate Planning In 2020, an individual may gift up to $15,000 ($30,000 per couple) to any person free of gift tax (the annual exclusion gift). Annual exclusion gifting is a powerful tool to reduce the value of an estate and remove future appreciation and income, provided it is affordable. Considering recent market volatility, certain marketable securities or business interests may be depressed and the gift amount for tax purposes is the market value today rather than what it could be soon or was recently. For example: stock shares that have decreased in value by 30%, allows for gifting shares worth $19,500 a month ago to be gifted for $15,000 today. Gifts of over the annual exclusion amounts will require an informational gift tax return. Always confirm with your financial advisor that you are on track with your own retirement planning prior to making any significant gifts. The time to organize is now. If you have not created your estate plan yet, now is a great time to do so.
- Charitable Donations Review your charitable giving with your advisors to determine if you could benefit from increased charitable giving this year, given new or increased tax incentives created under the CARES Act as charities have also been impacted by recent Coronavirus-related hardships. If you are interested in how charitable contributions have changed since the passage of the CARES Act, you can learn more here.
- Rebalance and Realize Capital Losses Talk with your financial advisor to review your investment portfolio and determine if any asset classes are over- or under-weighted as compared to your investment policy statement and/or risk profile. As markets shift, either over time or given the recent volatility, the portfolio allocation may change. Rebalancing the portfolio simply buys and sells certain asset classes as appropriate to bring your portfolio in line with your criteria. One of the benefits of rebalancing is you end up buying more of an asset class that has declined, which generally results in buying low. Or, depending on what works for you, it may make sense to sell a few positions that have recently lost value to generate capital losses. Capital losses offset capital gains which can then offset up to $3,000 of ordinary taxable income. Then, any unused capital losses are carried forward and can be used against future capital gains. While we don’t recommend selling across the board right now, your advisor may determine it makes sense to realize a few losses.
- Defer Tax Payments The IRS and Treasury Department announced that taxpayers may defer filing most tax returns and payments previously due on April 15, 2020, to July 15, 2020. Any related interest and penalties are waived. First and second quarter 2020 estimated Federal income tax payments are deferred until July 15, 2020. Allowing for payment deferral(s) increases working cash that individuals and businesses have on-hand to bridge this time when revenues may be down. However, if you expect a refund related to your 2019 tax returns, you are encouraged to file your return as soon as possible to access the funds owed to you. Also, since the filing due date was extended, contributions can be made to an IRA for 2019 through July 15, 2020.
- Revisit Your Financial Plan The reality is that many portfolio values have decreased due to the recent market volatility, and most people are wondering if they are still on track to be able to retire, or continue living the lifestyle they have become accustomed to. Advisors at Beacon Pointe are here to help – our team of financial planners and investment advisors have the ability to update your financial plan based on current values, as well as run hypothetical scenarios showing higher values. Fortunately, assumptions about future investment returns will likely increase as a recent market correction has now been accounted for.
- Try to Keep a Bit of Perspective Lastly, try to remember that even though it doesn’t feel so in the current moment, this difficult period of time will eventually become temporary – the virus will fade in the fullness of time and things will go back to a relative “normal.” Take a breath, re-evaluate and have the confidence and long-term foresight that this too shall pass.
Important Disclosure: This report is for informational purposes only. Opinions expressed herein are subject to change without notice. Beacon Pointe has exercised all reasonable professional care in preparing this information. The information has been obtained from sources we believe to be reliable; however, Beacon Pointe has not independently verified, or attested to, the accuracy or authenticity of the information. Nothing contained herein should be construed or relied upon as investment, legal or tax advice. All investments involve risks, including the loss of principal. An investor should consult with their financial professional before making any investment decisions.
Disclosure: This article is not to be taken as investment advice and should not be relied on for such advice or as a substitute for consultation with professional accounting, tax, legal, insurance, or financial professional. The observations made in external articles are independent of Wimple and should not be read as financial recommendations.