5 Timely Financial Planning Updates
The bear market and recession we’re facing, along with the government’s response, have provided planning items and opportunities to consider to best position your finances going forward. This is not a comprehensive summary of the legislation, or all the planning moves individuals can make. I have highlighted certain items and ideas that may work for my readers. Here’s a complete summary of the CARES Act for more information on the rest.
Tax time extended: The IRS has moved its tax filing and payment deadline from April 15th to July 15th. This also means that the IRA contribution deadline has been extended. If you anticipate a refund, it’s still a good idea to file as soon as you can so you receive that refund faster. If you expect to owe taxes, you can defer your payment without penalty until July. Most states have followed the IRS’s lead.
RMD’s suspended: Required Minimum Distributions are not going to be required in 2020 from retirement accounts or Inherited IRAs. Discuss with your financial advisor and CPA whether you should cancel your scheduled distribution for this year, which is likely a good idea if you do not need to withdraw the money for living expenses. It likely avoids having to withdraw IRA funds that have decreased in value and could save you on taxes as well. If you have already taken RMD’s for this year, you may be able to pay them back using a 60-day rollover or new distribution rules created for this event. Consult your advisor or CPA.
Penalties waived: The 10% penalty for retirement account withdrawals before the age of 59.5 has been suspended for up to $100,000 per person. While the tax is still owed on the distribution, it can be spread evenly over three years and you do not need to have a mandatory tax withholding from the distribution. You can also recontribute the funds during those three years. If you’re going to be in a low income year because of a lay-off, furlough, or income impacted by the recession, it may make sense to capitalize on this opportunity to get taxable retirement assets out at low rates and penalty free. However, if you can do this and do not need the funds for living expenses, consider # 4 below. You should also discuss if it makes sense to do the three-year tax spread or pay the tax all in one year, likely depending on how low your 2020 income will be compared to the next couple of years. If it’s going to be much lower this year, even with the distributed retirement account funds added in, it may make sense to pay all the tax this year.
Conversions encouraged: The bear market likely means that your retirement account values are down. In addition, as per item #3, your overall income could be down as well. Both of these factors, plus the fact that tax rates are historically low, could contribute to making a conversion from a traditional IRA to a Roth IRA attractive this year. Quick reminder: traditional IRA assets grow tax-deferred, but you typically pay income tax on any distributions from the account. Roth IRA assets grow tax-free and the distributions are tax-free. Review with your financial advisor and CPA whether you are a good candidate for a Roth conversion this year.
Businesses helped: If you are a business owner, including if you are self-employed, the CARES Act provides opportunities for assistance you need to know about. The Paycheck Protection Program (PPP) provides loans for small businesses with a good amount of the loans set up to be forgiven. The Economic Injury Disaster Loan (EIDL) and an associated grant program provide economic relief to small business impacted by the recession. If you do not take advantage of the PPP loans, you can receive a payroll tax credit or deferral if your revenues are severely impacted. Talk to your banker, corporate lawyer, CPA, and financial advisor to see what relief programs are available to you business and consider taking advantage of them quickly.
For more help, please check out the companion piece 3 Things Investors Should Know Now.