Six Planning Ideas in response to COVID-19
COVID-19 (Novel Coronavirus) is a pandemic that will have a lasting impact due to health and mortality implications in our nation and across the globe. The virus has also created financial market disruption and negative economic consequences. As we reach out to clients, we are advising them not to take extreme actions. However, there are several small steps you can evaluate taking this year that could position you to move financially forward after the worst of COVID-19 is behind us.
- Assess your income and financial reserves.
If you are still working this includes understanding any risks associated with a potential change in income and employment as well as the status of your emergency fund. We typically advise 3-6 months of expenses set aside for emergencies but increasing this to 6-12 months may be helpful if you can set extra income aside. For those in retirement, having a solid understanding of your income versus expenses and not having living expenses needed for the next two to three years subject to market declines can make the rollercoaster of investing much more comfortable.
- Reach out for a check-up on your risk assessment and portfolio rebalancing.
How did you handle the rapid and deep market losses in February and March of 2020? Risk tolerance is how emotionally comfortable a person is with taking financial risk. By knowing how comfortable a client is with investment ups and downs, we can make sure our clients are appropriately invested for the long-term. Material portfolio changes are likely not best made in the short-term, but we anticipate markets will rebound based on historical experience and can work collaboratively in the coming months to rebalance based on your specific risk tolerance and overall financial picture.
- Review refinancing opportunities.
Market conditions have resulted in Federal Reserve emergency rate cuts and this may provide the opportunity to take advantage of lower interest rates on mortgages, student loans, and other consumer debt. When refinancing mortgages evaluate an appropriate amortization – for example, a couple in their late 40's may elect for a 15 or 20-year mortgage note to ensure the mortgage is paid off before retirement and would also likely qualify for a lower rate than a standard 30-year term mortgage. Student loan borrowers should cautiously consider refinancing out of a government student to a private loan structure, whereas private loan refinancing into a low, fixed-rate structure is likely an attractive opportunity right now. Be prepared to be patient due to a surge in debt refinancings.
- Implement tax diversification with a Roth conversion.
Converting pre-tax retirement savings in a retirement plan or IRA account to a Roth account is often a taxable strategy. Due to recent market losses, many retirement accounts report lower balances thus if you complete the Roth conversion while market values are lower your tax obligation will be less. This is particularly true for individuals and families who are in historically low tax brackets as a result of the Tax Cuts and Jobs Act of 2017 (set to expire after 2025). Roth accounts can manage the risk of tax rates increasing in the future and create distribution planning opportunities in retirement. Moreover, the 2019 SECURE Act made Roth IRAs a preferred account to inherit because non-spousal beneficiaries of IRA accounts are generally required to withdraw funds over 10 years. Inherited Roth required minimum distributions are generally tax-free whereas pre-tax retirement account required minimum distributions are taxable as ordinary income to the beneficiary.
- Harvest your Losses.
When non-retirement investment account holdings report a loss there may be the opportunity for investors to adjust their portfolio and as a result, realize a capital loss or use the loss to offset capital gains. The amount of the excess loss that you can claim to lower your income is the lesser of $3,000 ($1,500 if married filing separately) or your total net loss. If your net loss is greater than $3,000 you can carryforward the excess loss to offset income in future tax years. This strategy called "tax-loss harvesting" helps investors make the best of a loss situation.
- Prioritize estate planning.
Our last idea is more of an important reminder that estate planning is always best done before you need your documents. The value of having financial and healthcare documents in place is magnified during a healthcare crisis. Collaborating with an estate planning attorney to draft your documents and then partnering with your financial planner to implement the documents is a gift to yourself and more importantly to your loved ones. If you have documents but have not reviewed them recently an estate planning review meeting with your attorney will be time and money well spent. The Tax Cuts and Jobs Act of 2017 doubled the amount of lifetime estate and gift tax exclusion to approximately $11 million individually. This higher exclusion amount, also set to expire after 2025, make gifting strategies a timely topic to evaluate if removing assets from an estate is a priority. Also, the 2019 SECURE Act new beneficiary rules may require an update to your documents or may adjust how you plan to pass retirement assets within your estate. Estate planning can be accomplished while you are “safer at home” via video conference and phone meetings.
Questions on how these planning ideas relate to your financial picture? Reach out to your Crescendo Financial Planner to schedule a financial planning meeting or firstname.lastname@example.org to schedule your introductory meeting. We continue to meet with clients and prospective clients via video and phone meetings and look forward to resuming face to face client meetings and workshops when social distancing ends.
Brooke Napiwocki, CFP®, MBA
Financial Planner, Crescendo Wealth Management LLC
Office 262-685-3375 | Web www.crescendowm.com
Certified Financial Planner Board of Standards, Inc. owns the certification marks CFP®, Certified Financial Planner™ and federally registered CFP (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. The information provided is not intended to be a substitute for specific individualized tax planning or legal advice. We suggest that you consult with a qualified tax or legal advisor. Securities offered through J.W. Cole Financial, Inc. (JWC) Member FINRA/SIPC. Advisory services offered through J.W. Cole Advisors, Inc. (JWCA). Crescendo Wealth Management, LLC and JWC/JWCA are unaffiliated entities.