We know this is a time of uncertainty given the Coronavirus (COVID-19) pandemic in the U.S. and around the globe. As always, but especially now, we are committed to serving our members, customers and their families.
The Coronavirus has had a significant impact on the global health systems, economy and livelihood. While it seems impossible for this situation to have a silver lining, it may provide an opportunity for you to spend some time reflecting on your financial plan. With the extra time you may have at home, we’ve provided you with some topics and options to consider, with resources at your fingertips. Here are a few:
1. Consider making a 2020 Roth conversion while markets are lower relative to where they were to potentially reduce tax liability
2. Consider investing uninvested cash that is not needed in the next two years
3. Harvest tax losses in non-qualified accounts and reposition assets for success
4. If you own an older Non-qualified Variable Annuity, consider shifting into a lower cost brokerage account while the markets are lower relative to where they were to reduce taxes on the shift
5. Refinance high interest debt
6. For small business owners, investigate the various relief programs provided by the recently signed CARES Act
2020 Roth Conversions
For those of you that are nearing or in retirement age you may want to explore the option of Roth conversions. By converting dollars to a ROTH IRA from your Traditional IRA, or employer retirement plan now, those account values will be less when calculating your required minimum distributions. You pay the tax now so you may reduce your future tax liabilities. Roth conversions are especially attractive currently since the Tax Cut and Jobs Act of 2017 was passed, which lowered the percentages in our tax bracket system. See my previous blog about the new SECURE Act for more details on using this strategy.
Converting assets to a ROTH IRA is a taxable event, but when markets are down, there are other benefits:
1. If you were planning to convert, say, 100 shares of Apple stock 6 weeks ago, you would have been converting a dollar amount of about $32,500 (assuming AAPL’s price was $325/share). If we assume you would pay 25% tax on that conversion you would be paying $8,125 in tax in 2020 in order to convert. As of the writing of this blog, AAPL’s price is $254/share. So, you can convert the same number of shares (total value $25,400) and pay only $6,350 in tax. The best part is that when the 100 shares gets into the Roth the growth from that point on is tax deferred, and could be tax free in the future with a “qualified distribution.” You saved $1,775 in taxes and your shares can grow tax free moving forward when the recovery hopefully happens in the coming months and years.
2. You could also take advantage of the current low market if you were planning to convert a specific dollar amount rather than a specific number of shares. If you were planning to convert $50,000 of an index fund with a price six weeks ago of $50, you would have been preparing to convert 1,000 shares. If the price dropped by 25%, as many funds did during the past 6 weeks, the price would now be $37.50. Now with the lower price you could convert 1,333.33 shares if you stuck with the $50,000 amount. This doesn’t save on taxes, but it does get many more shares into your Roth IRA which can grow tax free in most cases.
Cash on the Sideline?
If you are one of the fortunate people who has a large amount of cash savings, this could be an excellent opportunity for you. If you look at a historical chart of the S&P500 index (which represent the 500 largest companies in the United States), you will see what the typical response to a dramatic drop in market prices is over the long term. Usually, you see a recovery and increasing stock prices after a large decline over the following years. See the below chart from Charles Schwab:
One way or another, and in different amounts of time, the market tends to recover. Obviously, this is not guaranteed, but it depends on your belief in the American financial system.
It is important to remember that the stock market is not gambling. A stock’s value depends on the profit that the company is projected to make in the future. The market then guesses whether those projections are correct, and the price rises and falls based on those guesses. Another consideration is that the company has employees who need to make money for their families to survive. The employees are dedicated to the success of their company because their financial livelihoods depend on it. The question becomes: Do I think that things will get so bad that people will stop going to work? If you believe the general public will continue to get up daily, go to work, and produce a great product or service for their customers then you might consider taking on the risk of investing in markets after a dramatic downturn, such as the one created now by COVID-19.
Perhaps you pick a couple of your favorite companies that are large and strong and invest in them. Perhaps you just keep it simple and choose a diversified, low cost index fund. Either way, the opportunity for growth tends to be highest after a recent decline in stock prices. Just be sure to not invest money you may need in the next couple of years, as we never know what is around the corner in the stock market.
Harvest Tax Losses and Reposition for Success
Sometimes you have an old crummy stock position that is one that you want to get rid of, but you just can’t pull the trigger because you don’t want to sell at a deep loss. You know the adage, “Buy low and sell high,” NOT, “Sell low and buy high!” But what about, “Sell low and buy low?”
Let’s face it, times are tough in market prices. But do you think one stock is going to perform better from this point on than another in your portfolio? Do you think a company that provides work from home capabilities might be a better stock to own right now than an oil company? Do you think a restaurant chain is going to perform well in the coming months compared to a home gym equipment company? Hmm, dramatic change in the world may require dramatic change in your portfolio of stocks.
This is a great time to consider selling stocks low and buying into some pretty darn good ones at low prices, too! It’s important to focus on where the market is going, not where it came from. So, if you want to take advantage of this dip to purchase some companies you think will fare better in the next couple of years, it is definitely a time to consider selling low and buying low.
Oh, by the way, if you do this you can harvest those tax losses on the sale of your old crummy stock that you can use to offset future gains and/or income down the road when you file your next tax return. It could be a win-win from a financial planning standpoint.
Non-qualified Variable Annuity Swap
You may be an owner of a non-qualified variable annuity (NQVA). This is a variable annuity that is not held in a qualified account, like an IRA account. These products have some great qualities:
– They are tax-deferred (you don’t get a 1099 for them each year).
– They can have some valuable riders that you added at an additional expense
- – Income riders
- – Death benefit riders
- – Market protection riders
– There is no limit in how much you can contribute.
There are some potential challenges too:
- – They have some liquidity restrictions similar to IRAs that you must pay a penalty in most cases to access the funds prior to age 59 ½.
- – Most annuities will have a surrender period where penalties apply for transferring the funds with a certain number of years after starting the contract, usually 5-20 years.
- – Variable annuities may have higher internal fees than comparable investments that are not variable annuities.
- – Gains are taxed as income, not capital gains.
Because of these challenges, especially the higher fee structure, it may be advisable to consider a similar but lower cost investment alternative to a NQVA. First, if you are using the annuity for its contractual benefits (riders discussed above) typically you should not get rid of it. But if the annuity is out of its surrender period, you are not going to use the riders, you are over 59 ½, and you want to move into a lower fee type investment you may consider making the change now at lower market prices.
The reason is due to the fourth challenge above. The gains are taxed as income, not capital gains. For a “Married Filing Joint” family making $150,000 per year adjusted gross income, your income tax rate on your next dollar is currently 22%. Your capital gains tax rate is 15%. The future growth on the annuity is likely to create a higher tax to you when you liquidate it than an account taxed at capital gains rates, assuming tax laws don’t change.
When the market declines as it has recently, your gains in your current NQVA will most likely be less than they were 6 weeks ago. So, you can move the money out of the NQVA, pay income tax on the lower gain amount, move the money into a non-qualified investment account, and have the future growth of the new account taxed as capital gains. This can also helps with inheritance as NQVAs’ gains are taxed as income to the inheritor whereas capital gains get erased in most cases as the inheritor gets a step up in cost basis to the price at the date of death.
This is the easiest of the bunch! If you have any debt, especially a mortgage, with an interest rate over 4% you should give a mortgage broker a call and see about refinancing.
Refinancing means that you take out a new loan at a lower interest rate than your previous loan and use the proceeds to pay off the old loan. Even a small reduction in interest rate can result in several thousands of dollars in savings over the life of the loan. There are some costs involved with refinancing, but with very low rates the long-term benefit often outweighs the cost of setting up the new loan. If the interest rate can be lowered, you will likely see a reduction in your monthly payment as well, so there is an immediate benefit to help with lost income during COVID-19.
Here is a nifty refinance calculator to see if there may be a benefit to you.
CARES Act Opportunities and Government Assistance
On March 27, 2020 President Trump signed the CARES Act into law. It is the largest aid package ever signed into law by a government in the history of the world at $2.2 trillion. The act is designed to help Americans remain afloat during what is hopefully this temporary economic suspension to flatten the curve of instances of COVID-19. There are many applications for individuals and small businesses. A summary, provided from this article from Forbes, is below:
- Direct payments: Americans who pay taxes and were not claimed as dependent in 2019 will receive a one-time direct deposit of up to $1,200, and married couples will receive $2,400, plus an additional $500 per child. The payments will be available for incomes up to $75,000 for single filers and $150,000 for joint filers. Reduced payments are available for single filers with income up to $99,000 and joint filers with income up to $198,000.
- Unemployment: The program provides $250 billion for an extended unemployment insurance program, expands eligibility, and offers workers an additional $600 per week and will fund up to 13 additional weeks, on top of what state programs pay. It also extends UI benefits through December 31, 2020 for eligible workers. The deal applies to the self-employed, independent contractors, and gig economy workers.
- Payroll taxes: The measure allows employers to delay the payment of their portion of 2020 payroll taxes until 2021 and 2022.
- Use of retirement funds: The bill waives the 10% early withdrawal penalty for distributions up to $100,000 for coronavirus-related purposes, retroactive to January 1, 2021. Withdrawals are still taxed, but taxes are spread over three years, or the taxpayer has the three-year period to roll it back over.
- 401(k) Loans: The loan limit is increased from 50% of your vested benefit up to $50,000 to 100% up to $100,000.
- RMDs suspended: Required Minimum Distributions for all retirement accounts are suspended for 2020.
- Charity. There is a new provision that provides an above-the-line deduction for charitable contributions, plus, the limits on charitable contributions are changed.
- Small business relief: $350 billion is being dedicated to preventing layoffs and business closures while workers have to stay home during the outbreak. Companies with 500 employees or fewer that maintain their payroll during Coronavirus can receive 2.5 times average monthly payroll costs up to $10 million. If employers maintain payroll, the portion of the loans used for covered payroll costs, interest on mortgage obligations, rent, and utilities , along with specific future staffing requirements- loans could be forgiven.
- Net Operating Losses: The Tax Cuts and Jobs Act (TCJA) net operating loss rules are modified. The 80% rule is lifted, and losses can now be carried back five years.
- Excess Loss Limitations: The excess loss limitation (ELL) rules for pass-through entities are suspended.
- Interest Expense Limitation: The interest expense limitations are increased to 50% from 30% for tax years beginning in 2019 or 2020. Taxpayers can also elect to calculate the interest limitation for 2020 using their 2019 adjusted taxable income as the relevant base, which often will be significantly higher.
- Large corporations: $500 billion will be allotted to provide loans, loan guarantees, and other investments. These will be overseen by a Treasury Department inspector general. These loans will not exceed five years and cannot be forgiven. Airlines will receive $50 billion (of the $500 billion) for passenger air carriers, and $8 billion for cargo air carriers.
- Hospitals and health care: The deal provides over $140 billion in appropriations to support the U.S. health system, $100 billion of which will be injected directly into hospitals. The rest will be dedicated to providing personal protective equipment (PPE) for health care workers, testing supplies, increased workforce and training, accelerated Medicare payments, and supporting the CDC, among other health investments.
- Coronavirus testing: All testing and potential vaccines for COVID-19 will be covered at no cost to patients.
- States and local governments: State, local, and tribal governments will receive $150 billion. $30 billion is set aside for states, and educational institutions. $45 billion is for disaster relief, and $25 billion for transit programs.
- Agriculture: The deal would increase the amount the Agriculture Department can spend on its bailout program from $30 billion to $50 billion.
Below is additional and more detailed information used with permission from Garry Albert, CPA.
TAX DEADLINES AND PAYMENT EXTENSIONS
The Treasury Department, IRS, Colorado and other states issued guidance on both tax filing and payment relief. Here are the summaries.
FEDERAL AND STATE RELIEF PROVISIONS
- – Families First Coronavirus Response Act – This link includes information about common issues employers and employees face when responding to COVID-19, and its effects on wages and hours worked under the Fair Labor Standards Act (FLSA), job-protected leave under the Family and Medical Leave Act (FMLA), and paid sick leave and expanded family and medical leave under the Families First Coronavirus Response Act (FFCRA). Additionally, it provides the Employee Rights Posters (and Poster FAQs) employers are required to display/provide to employees.
- – For Employers: Employer Paid Leave Requirements
- – FAQs regarding FFCRA
- – For Employees: Employee Paid Leave Rights
- – Coronavirus Aid, Relief, and Economic Security (CARES) Act – Signed into law on 03/27/2020, CARES provides loan forgiveness, small business support, unemployment insurance enhancements, and federal loans to industries severely impacted by the pandemic. In addition, it provides tax relief and tax incentives for individuals and businesses alike. The majority of the tax relief is designed to increase liquidity in the economy, largely through the relaxation of limitations on business deductions and the deferral of taxes, but also with the introduction of recovery rebates for individuals.
STATE OF COLORADO
- – COLORADO DEPARTMENT OF LABOR & EMPLOYMENT (CDLE) – The State has adopted temporary emergency rules for unemployment requirements. This site provides a variety of resources for workers and employers who are impacted by the Coronavirus. Here is some helpful information for those seeking unemployment or employers with questions from employees:
- – For Employers
- – The Colorado Health Emergency Leave with Pay (“Colorado HELP”) Rules provides paid sick-leave information, including which employees and employers are covered under the Rules and additional requirements per the State (versus Federal).
- – Additional resources for employers from CDLE can be accessed HERE.
- – For Employees
- – Employees whose employers are closed or working fewer hours click HERE for information on unemployment benefits and how to file an unemployment claim.
- – HERE are some common FAQs on qualifying for unemployment
DISASTER LOAN ASSISTANCE
Check with your banking relationship first. Many banks are ready and able to help businesses and individuals with short and long-term lending needs. Your bank may provide the quickest and most efficient way to attain a loan as others, such as the Small Business Administration, may be inundated with applications at this time, thus the process may take longer.
Small Business Administration (SBA) Funding for Small and Medium-Sized Businesses. The SBA has expanded its funding programs for economic injury disaster loans. There are two programs available for disaster relief. Both programs can be used, however they are not intended for the same purpose. Below is a brief summary of the programs. Additional conditions and amendments may apply. We expect SBA to update their website information with the full details. HERE is their programs and resources page.
Note – Lenders are still receiving final guidance on the PPP. We recommend you contact your local bank to ensure they are a 7(a) lender and let your bank know you are interested in the PPP to start on any initial paperwork or needed documentation.
- Paycheck Protection Program (PPP). PPP is a new loan program created by the CARES Act and offered by the SBA to expand the availability of capital to small businesses and provide liquidity during the COVID-19 event. It is intended to allow for some loan forgiveness for retention of staff and payroll.
- – The program is available for businesses and qualifying nonprofit organizations with 500 or fewer employees. There are some additional rules for entities under collective ownership.
- – Business/borrower must have been in operation on 02/15/2020.
- – These loans are attained through authorized SBA 7(a) lending banks and other commercial lenders (versus direct through SBA). The application period ends 6/30/2020.
- – The maximum PPP loan to any business is $10 million – or – 2.5 times the average monthly payroll costs of the business over the year prior to the making of the loan and excluding the prorated portion of any annual compensation above $100,000 for any person (whichever is less).
- – The loan can be used for
- – Group healthcare benefit costs and insurance premiums
- – Mortgage interest, rent payments, utilities
- – Interest on debt owed prior to 02/15/2020
- – Payroll costs, including vacation and retirement benefits, salaries and tips, and severance payments (excludes independent contractors and employees who are paid more than $100,000 per year)
- – PPP loan terms include:
- – Maximum rate of 4%
- – Maximum of 10 years
- – No collateral required
- – Cannot acquire this loan if you are taking advantage of the new Employee Retention Tax Credit established under the CARES Act.
- – Interest and principal payments are deferred for 6 months to 1 year (interest will still accrue from the time of loan)
- – No prepayment penalties
- Economic Injury Disaster Loan (EIDL). The SBA provides disaster loans for businesses for various economic injury disasters, including COVID-19. This program was modified by the CARES Act, but some of the original terms of an EIDL remain, including the ability to borrow up to $2 million. However, the new CARES Act suspends the requirement for personal guarantees on loans under $200,000 and does not prohibit borrowers to attain loans from other sources. The program is slated to provide emergency grants of up to $10,000 within 3 days of the borrower submitting an application. Note, however, the grant amount would reduce any loan forgiveness under the PPP.
- – The program is available for small businesses, small agricultural cooperatives, small aquaculture businesses, and most private non-profit organizations. Ineligible entities include religious organizations, charitable organizations, gambling concerns, casinos, racetracks, and agricultural enterprises as defined in Section 18(b)(1) of the Small Business Act (neither business nor its affiliates are eligible).
- – Eligible entities may qualify for loans up to $2 million.
- – The interest rate is 3.75% for small businesses. The interest rate for non-profits is 2.75%.
- – Terms are determined on a case-by-case basis, based upon each borrower’s ability to repay and to keep payments affordable.
- – Generally, loans over $25,000 require collateral. SBA takes real estate as collateral when it is available. However, the SBA will not decline a loan for lack of collateral, but requires borrowers to pledge what is available.
- – These loans may be used to pay fixed debts, payroll, accounts payable and other bills that can’t be paid because of the disaster’s impact. The loans are not intended to replace lost sales or profits or for expansion.
- – You must apply through the SBA. Paper applications are acceptable, however the SBA encourages filing electronically for quicker response and accuracy.
- – What will I need to apply for an EIDL?
- – Completed SBA loan application (SBA Form 5)
- – Completed Tax Information Authorization(IRS Form 4506T) for the applicant, principals, and affiliates
- – Complete copies of the most recent Federal Income Tax Return
- – Schedule of Liabilities (SBA Form 2202)
- – Personal Financial Statement (SBA Form 413)
- – Other information may also be requested some examples include:
- – Complete copy, including all schedules, of the most recent Federal income tax return for principals, general partners or managing member, and affiliates
- – Current year-to-date profit-and-loss
- – Additional Filing Requirements (SBA Form 1368) providing monthly sales figures
With a dramatic shift in the financial landscape comes several financial planning opportunities that may play into your benefit. Contact your advisor to discuss whether you could benefit from some these opportunities.