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 
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. 
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: 
Key: X-axis: Year | Y-axis: Price
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.
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.
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:
There are some potential challenges too:
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. 
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:
Below is additional and more detailed information used with permission from Garry Albert, CPA.
The Treasury Department, IRS, Colorado and other states issued guidance on both tax filing and payment relief. Here are the summaries.
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:
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.
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.
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.
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