1: Revisit The “Am I On Track?” Conversation
Although the impact of recent events certainly varies from one client to the next, there is a nearly universal benefit to simply knowing where one stands. Whether the news is good (relatively speaking, of course) or bad, the ‘knowing’ has the potential to reduce anxiety and stress.
#2: Help Adjust Your Budget (Effectively) As Necessary
For those clients whose plans are materially impacted by the current economic crisis and market pullback, perhaps one of the most valuable services our advisors can provide is to help review your monthly/annual spending to make adjustments, as necessary, to make the plan work again. More specifically, there are two key functions an advisor can play in this role.
First, we can help clients adjust spending in financially effective (and realistic) ways. For instance, many individuals believe that the best way to mitigate a market pullback is to substantially reduce spending – say by 25% or more – for a few years, until the market “recovers”. The reality, though, is that such cuts in spending are not only very painful but are often not as effective in managing long-term safe withdrawal rates as other less severe, but more elongated spending changes.
Second, we can serve as a sounding board to help you talk through and make potentially difficult decisions. Whether a client is 85 or 35, making cuts to existing spending can be difficult. In some cases, the expense(s) to go may be obvious, but other times, it may be more challenging, particularly in situations where spouses disagree on what should be cut. Advisors can help clients to remain focused on the things which are most important to them and to serve as impartial arbiters when/if desired.
#3: Make 2020 Roth Conversions While the Markets Are Low
The decision of whether to make a Roth conversion – or not – is primarily a tax decision, which comes down to answering the question “Would I rather pay tax on this money at my income tax rate today, or at my income tax rate in the future?” But once the decision to make a Roth IRA conversion has been made, leveraging the timing of that conversion can add a valuable boost. Making a Roth conversion during a market dip can be a particularly opportune time.
#4: Create A Game Plan for What Happens If the Emergency Reserve Runs Dry
Financial Planning 101 says to “create an emergency fund for a rainy day” that typically consists of at least 3-6 months’ worth of expenses in cash, or liquid cash alternatives.
Our advisors are helping clients establish the next-in-line source of cash to use after the emergency reserve runs dry. Notably, although clients may still be months away from running low on emergency funds, it’s important to identify the next source of cash now, as it can provide both psychological benefits (e.g., peace of mind) for clients, as well as practical benefits as some options to consider may take weeks or longer to establish.
#5: Consider Reducing and/or Temporarily Eliminating Payments That Don’t Have to Be Made
Many individuals’ cashflows are impacted by the current COVID-19 crisis. Meanwhile, others may be fortunate enough to be relatively unaffected in this regard, yet the uncertain future of the economy and markets warrants caution, especially where defensive actions can be taken with little to no downside or additional cost.
To that end, our team can help you understand the types of payments that can (or should) currently be considered for reduction. In particular:
· Federal Student Loan Payments
· Mortgage Payments.
· Credit Card Payments.
#6: Put Refunded 529 Plan Funds Back into the 529 Plan Via Rollover
While the extent of the COVID-19 epidemic has led many institutions of higher learning to transition from live, in-person courses to online distance learning, some classes have simply been canceled, leading to the academic institution refunding all or a portion of previously paid amounts. In other situations, students may have chosen to temporarily leave school to the same effect, receiving tuition refunds.
Where tuition and/or other qualifying educational expenses that are now being refunded were paid with 529 plan funds, strong consideration should be given to replacing such funds into a 529 plan. As a result of a change made by the Protecting Americans from Tax Hikes (PATH) Act of 2015, and as further explained by the IRS in Notice 2018-58, individuals receiving such refunds can roll them back into the student’s 529 plan within 60 days of receipt. Refunds rolled back into a 529 plan do not count towards the plan’s contribution limit.
#7: Use A Qualified Health Saving Account (HSA) Funding Distribution (QHFD) To Fund Health Saving Accounts
In general, it is best to try and reserve amounts in retirement accounts for their intended purpose… retirement. Sometimes, however, life gets in the way of even the best of intentions and plans. For some clients, that time may be now.
For those clients with cashflow problems who need to pay medical bills or can’t otherwise fund Health Saving Account (HSA), one potential (partial) solution would be to use the little-known Qualified HSA Funding Distribution (QHFD). A QHFD is a once-in-a-lifetime (quite literally, as in an individual is only permitted to make one QHFD during their lifetime) option to move money directly from an IRA to an HSA. The amount that can be transferred is limited to the maximum HSA contribution that the individual is eligible to make during a given year.
For 2020 the maximum HSA contribution is $3,550 for individuals with self-only coverage and $7,100 for individuals with family coverage. Individuals 55 and older by the end of the year may contribute an additional $1,000 catch-up contribution.
For those who would otherwise be unable to make their 2020 HSA contributions, but who have available IRA dollars, there are two reasons why a QHFD should be strongly considered. First, if funds are tight enough that the HSA contribution can’t be made, it likely means that if what seems-to-be-inevitable medical costs arise, there won’t be a ‘good’ source of funds from which to pay them (and being HSA-eligible means an individual has a high-deductible health plan (HDHP), which means, at least initially, insurance will be no help either).
Certainly, a distribution from an IRA could be used to pay such an expense, but that distribution would be taxable, and potentially subject to a 10% penalty as well (note that the 10% exception for medical expenses only exempts expenses in excess of 7.5% of AGI for 2020). By contrast, making a QHFD first, and then taking a distribution from the HSA to pay the same expense would be both tax- and penalty-free.
Second, even for those who do not have imminent expenses, if there aren’t enough available funds to cover making a full HSA contribution, then the QHFD should be strongly considered. Notably, HSAs are generally higher on the hierarchy of tax-preferenced accounts for most individuals. Thus, if the choice is to have dollars in a Traditional IRA or to have the same dollars in an HSA account, it generally pays to have those dollars ‘live’ inside the HSA.
#8: Help Business Owners Reduce Or Pause Employer Contributions To Retirement Plans
Many small businesses, and small business owners, have been particularly impacted by the current COVID-19 pandemic. Current lockdown and/or social distancing policies have resulted in business revenues dramatically being reduced, or in some cases, eliminated altogether. During these turbulent times, many business owners are doing everything to keep their businesses afloat and to hang on to as many employees for as long as possible.
In some cases, those goals may be advanced by eliminating and/or reducing normally required retirement plan contributions. Many small business owners, for example, have incorporated either nonelective or matching safe harbor provisions into their 401(k) plans to allow themselves (and other highly compensated individuals) to contribute the maximum amount of salary into the plan annually, without worrying about testing.
Employers using SIMPLE IRAs may also wish to revisit their employer contributions. However, changes to employer contributions to SIMPLE IRA plans cannot be adjusted mid-year. Rather, they can only be adjusted prospectively for future years.
Nevertheless, employers with SIMPLE IRA plans who are struggling now may wish to look forward to 2021 to ‘recover’ some of their losses by reduced SIMPLE IRA matching contributions. While employees’ contributions are generally required to be matched up to 3% of their salary, the 3% rate can be reduced to as low as 1% in up to two out of five years.
#9: Fix A Previously ‘Unfixable’ Asset Location Problem
While gross returns certainly matter, at the end of the day, what really counts is after-tax returns. How much money did you make that you can actually spend? Certainly, generating tax-efficient returns can be bolstered in any number of ways, such as maximizing tried-and-true strategies like tax-loss harvesting, or simply by using tax-efficient investments in the first place.
The window may be limited, and changes may need to be made fast to capitalize on the current environment. We can help identify if such changes make sense for you.
#10: Revisit Clients’ Healthcare Proxies, Living Wills, And Advance Directives
Estate planning is often the last item to be checked off clients’ lists, as the thought of contemplating one’s demise is often too uncomfortable to deal with. In other situations, clients may not feel like they need an estate plan, because either they don’t feel they have ‘enough’ money, or because most or all of their assets will pass outside of probate.
Estate planning, of course, covers more than just the financial bases. A critical element of estate planning is the planning for what has traditionally been viewed as end-of-life care, making sure clients wishes regarding things like “Do you want to be kept alive through the use of artificial machines?” and “Do you wish to be an organ donor?” have been properly addressed.
For individuals who have not yet engaged in this sort of planning, the current COVID-19 crisis may be just the ‘kick in the pants’ needed to get moving. And while face-to-face meetings may not currently be recommended, most of the estate planning process (save for the actual signing and/or notarization of documents) can be addressed virtually or over the phone.
Once you are satisfied that your legal documents read as desired and reflect your current wishes, our advisors can facilitate discussions with your family, healthcare agents and/or other persons relevant to your planning.