In an effort to stave off the financial impact of the COVID-19 coronavirus for individuals and businesses, the government has unleashed an unprecedented array of stimulus programs, tax law changes, and other incentives to help stimulate economic activity.
As a result, there are now a number of unique and valuable financial planning opportunities or considerations that can benefit almost anyone, even if they weren’t impacted by the coronavirus. Here we go!
1. Review your liabilities
With the recent 1.5% interest rate cut by the Federal Reserve, interest rates are now at their lowest level since 2008. These rate cuts take time to filter through the lending system, but they eventually manifest as lower interest rates on mortgages, automobiles, and even credit cards. Now is a great time to review your existing loans for potential refinancing opportunities, such as with your mortgage (our financial planning team can do this for you).1 If you have enough equity in your home, you may be able to consolidate some of your higher-interest rate debt with a “cash-out refinance,” using proceeds from your low-interest rate mortgage to pay off high-interest rate debts, like a credit card. Note that prior to consolidating loans into a home loan, first discuss the asset protection considerations with your advisor.
2. Accelerate retirement savings
If you are still working, and comfortable with your financial position, consider accelerating contributions to your IRA, 401(k), or other employer-sponsored retirement plan. By completing your annual contribution earlier in the year, you allow more time for the money to grow tax-free. Plus, given the current market pullback, your contributions go further by buying assets that are well off their previous highs. If your contributions receive an employer match, confirm with your human resources department that changing the timing of your contribution won’t impact the match.
3. Check on your stimulus
The government is in the process of rolling out direct payments to taxpayers with the amount received varying by income, marital status, and number of dependents. Unsure if you will receive a payment? This link can show you how much your anticipated payment will be: https://www.kiplinger.com/tool/taxes/T023-S001-stimulus-check-calculator-2020/index.php. Want to get your payment faster through direct deposit or check on the status? Update your information with the IRS here: https://www.irs.gov/coronavirus/economic-impact-payments. Want a suggestion for what to do with that payment? See #2 or #4.2
4. Student loans
For federal student loans currently in repayment status, the government has automatically suspended payments through September 30, 2020. In addition, the interest rate on those loans has been temporarily set to 0%. If you are comfortably able, continuing to make payments on loans during this time period will go 100% to the principal balance, which can help reduce the overall cost of the loan. If you were on an automatic payment plan, and you wish to keep making payments during this time, you will need to contact your loan servicer to turn those back on.
5. Watch out for school refunds and 529 Plans
With educational institutions canceling campus classes for the remainder of the school year, many are starting to refund payments made for the costs of room and board that are no longer being used. If these expenses were paid for out of a 529 plan, the refund needs to be redeposited into the plan within 60 days; otherwise, it could be subject to tax and a 10% penalty. It’s a good idea to do this the old-fashioned way: send a paper check to the plan along with a letter explaining the refund and the statement from the school showing the reason. This way you have a paper trail if there are questions later.3
6. Tax deadline extensions
The IRS has postponed the deadline for income tax filing and payment to July 15, 2020. This move also extends the opportunity to make 2019 IRA or HSA contributions until this date. Estimated quarterly payments for both the first and second quarter of 2020 have also been delayed to July 15th. What does all this mean? You have more time to reduce your 2019 taxable income with an IRA contribution, or you can preserve the cash that would otherwise go to tax payments if you need it. Penalties and interest for late payments begin accruing on July 16th, so make sure you’re ready to make your payment by the deadline.
7. Enhanced qualified plan distribution rules
If you or your spouse have been financially impacted by COVID-19, the IRS has suspended penalties on early withdrawals from IRA and employer-sponsored retirement plans for distributions up to $100,000. The distribution is still subject to tax, but the IRS is allowing taxpayers to spread out recognizing the taxes in equal parts over the next three tax years (2020-2022). If you take this distribution, you have the choice to recognize all the tax in 2020, which could be a smart play if you’re going to be in a low-income tax bracket for 2020, and you expect to move up to a higher bracket in 2021 and 2022. Even better, the IRS will let you repay the distribution back into the account over the next three years. Not only do you get to resume the tax-deferred growth on your retirement assets, but you can reclaim any taxes paid on the distribution by filing an amended tax return.
8. Roth IRA opportunities
It may not seem like it, but now may be the ideal time to consider a Roth conversion. Let’s say that you have an IRA that was worth $200,000 that has dropped in value to $100,000. If you convert $50,000 of the account to a Roth, the amount of conversion will be included in your 2020 taxable income, but you’ve moved half of your taxable IRA assets to a Roth IRA, where future withdrawals will be tax-free. Once the market recovers, you’ll not only have double the amount of Roth assets than you would if you had converted before the market drop, but you’ve also dramatically reduced the amount of future required distributions from your taxable IRA. In addition, if your income has dropped significantly this year because of the coronavirus, you may find yourself eligible to make a Roth contribution. This area can get messy, so lean on us for help.
9. Worth over $10 million? Time to consider wealth transfers
For those who desire to transfer their wealth to the next generation, this is an ideal time for a number of wealth transfer techniques. The government sets a required interest rate (called the 7520 rate) that is used to determine the value of annuity payments, set intrafamily loan interest rates, and determine trust interest payments and remainder interest values. At the moment, the 7520 rate is around 1.2% and may move even lower next month. In English, this means that now is a very favorable time for certain types of trusts, as well as loans or asset sales to family members. If this applies to you, now is a great time to discuss your options with one of our estate planning attorneys.
10. Delayed RMDs
Speaking of required minimum distributions4 (RMDs), the IRS has suspended the requirement to take a 2020 RMD. This provides a couple of pieces of good news. First, if you were waiting until April 1st of this year to take your 2019 RMD, you no longer have to take it. Second, if you are turning 72 this year and were going to have to start your RMDs per the new law changes, you don’t have to. Want even more good news? If you’ve already taken your 2020 RMD, you can redeposit the funds within 60 days of the distribution to reinvest the funds and avoid the taxes. If you’re outside the 60-day window, or if the RMD was taken from an inherited IRA or inherited 401(k), the funds cannot be redeposited.5 With the number of new programs, initiatives, stimulus, and tax law changes for 2020, there is a vast array of opportunities. Your team at Creative Planning is here to help you navigate these options and determine what course of action is best for you.
Footnotes
- And if you owe money to an aunt or uncle, you may as well ask for a rate break! If you owe money to a loan shark, my advice is don’t even ask.
- Also good advice: don’t ask your kids for suggestions.
- I stand by ready to receive hate mail from everyone that works in the 529 department of a major financial institution.
- If you ever say this over a dinner conversation with friends, you will soon find yourself dining alone.
- If you are wondering ‘Has nearly every financial rule changed?” The answer is, yes, just about.
