In a world that seems out of control, it can be empowering to focus on the things that are within our control. Easier in theory than in practice. With the constant flow of headlines and new information surrounding the Coronavirus, it is often challenging to identify what information may apply directly to your personal situation and what can be disregarded. The silver lining, however, is that the market drawdown and recent legislative changes have created many opportunities for you to take control of your financial picture. Here are some noteworthy developments and financial planning strategies that should be on your radar:
Suspending your Required Minimum Distributions
What: The CARES Act waives Required Minimum Distributions (RMDs) during 2020. This provision is far-reaching and applies to traditional IRAs, SEP IRAs, and SIMPLE IRAs in addition to 401(k), 403(b), and Governmental 457(b) plans for both retirement account owners and beneficiaries.
Why: Unless you rely on your RMD for your living expense and cash flow needs, it is advantageous to leave your savings in your retirement account where it can grow tax-deferred. You’ll also avoid the income taxes associated with these distributions in 2020.
What: Sometimes an investment that has lost value can still do some good—or at least, not be quite so bad. The strategy that changes an investment that has lost money into a tax benefit is called tax-loss harvesting. Tax-loss harvesting allows you to sell investments that are down and then offset realized investment gains with those losses. The end result is that less of your money goes to taxes and more stays invested and working for you
Why: Even if you don’t currently have any gains, there are benefits to harvesting losses now, since they can be used to offset income or future gains. If you have more capital losses than gains, you can use up to $3,000 a year to offset ordinary income on federal income taxes, and carry over the rest to future years.
Charitable Contributions for Itemizers
What: Another important provision from the CARES Act with regard to your taxes is that the legislation temporarily increased the Aggregate Gross Income (AGI) limit on cash contributions to charities from a maximum of 50% or 60% of AGI to a maximum of 100% of AGI.
Why: Individuals who itemize deductions can elect to ignore the normal AGI limits for gifts of cash made to public charities in the calendar year 2020. Gifts of cash in excess of 100% would be eligible for the normal 5-year carryforward rule for 2021 and later years subject to the usual 50%/60% limits. Put simply, this is great news for both your favorite public charities as well as your tax bill.
Charitable Contributions for Non-Itemizers
What: Individuals who do not itemize deductions will be allowed up to a $300 charitable deduction for gifts of cash to public charities during 2020.
Why: Presumably, non-itemizing individuals filing a joint return will be allowed a $600 combined deduction.
What: A Roth Conversion refers to taking all or part of an existing Traditional IRA balance and moving it to a Roth IRA account. With Roth Conversions, investors pay ordinary federal and state taxes on the funds in the year of the conversion but are then able to take tax-free withdrawals in retirement. Another benefit is that Roth IRAs are not subject to annual RMDs, so your money can continue to grow tax-free without having to take distributions.
Why: The timing may be right for you to consider a Roth IRA conversion to take advantage of lower income and lower taxes in 2020. While current market volatility makes it nearly impossible to know the best time to convert, doing so when your retirement account values are down may lessen the tax impact of the conversion. Since the CARES Act allows you to suspend RMDs for 2020, you can convert assets from a traditional IRA to a Roth IRA this year without first satisfying the typically required RMD. Keep in mind that converted assets can’t be reversed or recharacterized at a later time.
Revisit Your Financial Plan
What: Your financial plan should act as a guidepost in these unsettling times and there is a real power in knowing where you stand in relation to your long-term goals. Reviewing your goals reinforces long-term thinking and should lead to better decision making.
Why: The economic effects of the Coronavirus have presented an opportunity to reexamine the big picture.
Scrutinize your discretionary spending. There is never a bad time to review your spending but now is an opportune time to take a fresh look at your budget. It could lead to increased savings, especially with many people being forced to delay travel plans and/or other big-ticket purchases this year.
Rebalance your portfolio. Most investors understand the need to have a target asset allocation. When asset values are volatile, as they were in March, your portfolio is going to deviate from your long-term targets. If you remain disciplined to your targets, it is a great way to take the emotion out of buying and selling. It will force you to reduce the assets or asset classes that have performed well and add to the ones that have declined in value. Remaining disciplined to a rebalancing strategy allows you to add a contrarian element to your portfolio that can lead to better long-term results.
Review education funding for your children or grandchildren. Because of the market downturn, now may be a good time to consider making a larger contribution or accelerating contributions to your 529 accounts. This is especially true for account owners with children and grandchildren that are younger and therefore have a longer time horizon until these funds are needed to pay for college education expenses. Investing at lower equity valuations has the potential to enhance long-term returns.
Establish your next in-line sources of cash. Standard convention tells us to have 3-6 months of living expenses saved in cash and cash alternatives. These dollars may be even more important if you have experienced a financial hardship or anticipate that possibility. The extra liquidity may allow you to keep your long-term investments intact, giving your finances and the economy a chance to recover.
While economic recessions are a normal part of the business cycle, they’re never an enjoyable experience, especially when brought on by a health crisis. Your ability to take advantage of some of these provisions and strategies outlined above will allow you to improve your financial outlook and when this crisis ends, you’ll be better positioned.
This document is provided for informational purposes only; you should not construe any such information as personal legal, tax, investment, financial, or other advice. All information is of a general nature only and does not address the circumstances of any particular individual. You alone assume the sole responsibility of evaluating the merits and risks associated with the use of any information contained herein before making any decisions based on such information. There are risks associated with investing in securities. Investing in securities, including but not limited to stocks, bonds, mutual funds, and money market funds involves a risk of loss. Loss of your principal investment is possible. The past investment performance of either HCM or any individual security is not a guarantee or predictor of future investment performance. There is no guarantee any individual investor or his or her investment advisor will achieve a particular investment objective.