‘If I Only Had Time’……Well, Now You Do!
Financial topics to review when there’s nothing else to do
First, they closed the festivals, then the theatres. They canceled sporting events, closed the schools, the playgrounds and parks. Then it was the ‘Containment Zone’ neighborhoods, offices, businesses, factories, entire industries and national borders.
Now that entire world is effectively semi-retired for a couple of months in hope of slowing down the spread of Coronavirus, there are some financial matters you may wish to address now and take full advantage of this precious opportunity. If you were saving these projects for a rainy day, well, that rainy day is here!
Transfer 401(k) Retirement Plans from Previous Employers
You may still have retirement plans with former employers. If you’re no longer working for those employers, you now have the ability to transfer those assets into a personal retirement arrangement and work with a professional advisor who can provide personalized advice on an ongoing basis.
If you don’t have a living will and related documents such as a Power of Attorney, Advance Directive, Health Care Proxy and Custody of Remains for example, which reflect your current wishes, Now’s the Time.
If your life insurance policies, retirement plans and annuities still have a name on file as primary beneficiary which no longer reflects your current wishes, they will get the proceeds of these funds which pass by contract regardless what your will or a probate judge says. Whatever’s still on file with the plan provider is exactly who the money will go to. Now’s the time to update your named Primary and Contingent beneficiaries on file if they are no longer accurate.
Year 2019 tax filing date until July 15, 2020:
Besides an opportunity for you and your tax advisor to relax, this also creates extra time for saving money to either make a prior-year contribution to a retirement account or pay any prior-year taxes still due.
Required Minimum Distributions (RMDs) waived for 2020
On December 20, 2019, the SECURE Act became law. Among the many features of the SECURE Act intended to reflect the fact that people are working well past age 70, RMDs were moved from the year you turn 70 ½ to the year you turn 72. As of a very recently, the Coronavirus bill features a waiver of RMDs for year 2020. If RMDs were still required in the current environment, they would require investors sell in a discounted market, only to put a stake through the heart of what’s left of the distribution with income tax.
Converting your Tax-Deferred Retirement Plan into a tax-free ‘Roth’ Individual Retirement Account (IRA):
During the 2008-09 financial crisis, the conditions to convert traditional retirement plans like IRAs, 401(k), 403(b), etc. into Roth IRAs were ideal if you were in a low tax bracket due to extended unemployment lowering income. The tax law of 2006 allows the conversion where you pay income tax on the Traditional IRA in the year you make the conversion, move the funds to a tax-free Roth IRA and take tax-free distributions in retirement.
However, the circumstances should be ‘just right’ for the conversion to make financial sense. For example, if you’re in a low tax-bracket in year 2020 due to extended unemployment and have enough time for the remaining after-tax funds to grow before you take distributions in retirement many years later, Roth IRA conversion may be suitable. Since the conversion can be done any time during a tax year, some investors may wish to delay this decision until later in the year when they’ll have a better idea what their tax-bracket will be.
10% tax penalty waived for 2020 tax-deferred retirement plan withdrawals
If you’re in low tax bracket this year or take a distribution from a tax-deferred retirement plan out of necessity, the additional 10% tax penalty for taking distributions before age 59 ½ will be waived for year 2020 distributions as part of the Coronavirus bill.
Increased Savings by Force
Because the only activity left in the world seems to be a walk in the woods (beware, they just closed three of the most popular national parks yesterday), don’t be surprised if you see your savings go up. Since you’re no longer spending money on services like restaurants, tickets, travel, commuting, retail or going out in general, your credit card statement could be halved.
Refinancing Real Estate
Refinancing your home depends on factors like how long you intend to live there, the type of mortgage you currently have as well as number of remaining years to name a few. Just because interest rates are low, does not necessarily mean it’s the ‘best time’ to refinance. Interest rates are one component of a multi-component equation.
Cash Flow Savings Tips:
If you are paid a fixed income or don’t have much fluctuation in your earnings, the other solution to enhance your savings is to spend less. That’s easier said than done, usually because most of us have no idea what we spend each month.
One approach that’s been very successful for investors is what’s referred to as the ’30-Day Financial Challenge’. This entails writing all of your expenses down for a month. Not just the easy things like mortgage and utilities but other expenses like what you pay in taxes, benefits, and the $500 you take from the ATM. Where does that go? A Starbucks here, a sandwich for lunch there, it all adds up.
In the process of writing things down, you may identify a few expenses which you may reduce or eliminate. So, it’s up to you to decide where you can save. As mentioned previously, we’re all forced to reduce our expenses at this time because the places we would have spent the money are closed for the time being.
Another solution for savings is what’s called ‘Delaying Impulse Purchases’. The way this used to work a few weeks ago is like this: It’s Friday, you’re tired and vulnerable, walking home and you pass a storefront with something in the window that has a spotlight on it. It could be a pair of shoes, electronics, whatever. You rationalize, ‘I deserve it, I’ve earned it, I can afford it’, all true. However, make a commitment to yourself that you’ll come back and buy it on Tuesday. By Tuesday, which used to be the slowest retail shopping day of the week, you’ll be refreshed after the weekend and you won’t be in the mood to go shopping. In fact, you’ll probably be in the mood to go home. In some cases, investors have been able to delay impulse purchases until a Tuesday, seven years later.
Of course, the storefront windows are closed at the moment, but there’s still online shopping. Usually after a glass of wine on a Friday when you’re tired and vulnerable. In this case, make a commitment to yourself that you will at least delay the online shopping until Saturday morning, after you’ve had your coffee. Adding things into a virtual ‘cart’ and putting the device down has saved quite a few investors from digital buyer’s remorse.
Managing your monthly bills:
If the Coronavirus crisis continues for more than a few weeks, things are likely to get a bit challenging (notice no one has ‘problems’ anymore). For Americans living paycheck to paycheck, coming up with a few hundred dollars is difficult under normal circumstances. If those paychecks are no longer available, there are not many choices other than incurring credit card debt (assuming the banks don’t take that away out of necessity) or liquidating assets at the worst possible time.
If all else fails, then the bills don’t get paid. When the phone calls and letters start to inevitably come in, ignoring them and going into hiding is generally the worst possible thing to do in most cases. It is often best to communicate with your lenders and utilities and respond to every call and letter as they come in. Those answering your calls are not out to scare you into making a payment because they know that is rarely a successful tactic. They just need to work with you towards a solution. There may be opportunities to spread out payments over a longer period of time, make partial payments and defer the rest, skip a month’s payment, etc. If you don’t have the money, explain to them that you are unable to pay and are using available funds for food and transportation only at this time, and if you have a plan to improve your circumstances, you should probably share that with your lender too.
Will there be long-term economic consequences of Coronavirus?
Let’s hope our lives get back to our normal routines in a matter of weeks, in which case the economy will likely have a quick recovery. If the global economic shut down due to Coronavirus remains in place for a several months, then it will be more difficult to get back to where we were a few weeks ago.
There could be some economic and social benefits that manifest due to Coronavirus. A few hypotheticals: Companies that can function as long as employees have access to phones and emails may conclude they’re paying way too much in rent for offices they don’t need. Employees may ask ‘why am I paying high taxes and losing hours to a daily commute when I can do my job from anywhere?’ Parents may ask ‘why are we paying so much in private college tuition when the entire spring semester was successfully completed entirely online?’ With all of the vigorous hand washing going on, there could be a significant reduction in old-fashioned flu next season. And the handshake greeting may end as we know it. We don’t know exactly what the consequences will be today, but we’ll know soon enough.
Whatever happens Brite Advisors USA will be there to support you with sound financial and investment advice.
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