Your Financial Future: Financial breaks should help
Everyone in the country has to deal with the coronavirus. It has crashed the stock market over 30%. Unemployment is going from the lowest in 50 years to possibly the highest. Everyone has to help by social distancing, remaining at home and washing our hands numerous times every day. The government is attacking the problems with a war time mentality.
Last week, Congress passed and the President signed the Cares Act. This new law will provide direct cash payments to many Americans, up to $1,200 per adult and $500 for each child. There are income requirements that must be met to receive the payments. These payments are expected to begin in a couple of weeks. The idea is to help make up some of the income that was lost due to forced business closures to slow the spread of the virus. These funds will be received income tax free.
Many creditors are allowing longer grace periods to make payments if you are experiencing a cash squeeze. The FHA has imposed a 60-day foreclosure and eviction moratorium on single family homes. The Cares Act suspends federal student loan payment through Sept. 30, 2020. If you are having trouble paying bills, reach out to creditors to find out what help may be available.
There has been a change in tax laws for required minimum distributions (RMD). If your RMDs are not part of a defined benefit plan, you can skip them in 2020. RMDs are the amount that people were required to take out at 72 under the Secure Act and at 70½ if you are under the old law. You can always take more out if you need the cash. Money taken out is taxed as ordinary income.
If you have already taken money out this year from an IRA and don’t need it, you may be able to put it back. There are two ways this may happen. Talk to your tax professional. If your IRA was invested in the market, this will keep you from locking in your market losses.
It may be a good time to consider a Roth conversion. This is when you pay the taxes now on your qualified money and convert it to a Roth. If you have a Roth for at least five years and are over age 59½, you do not need to pay taxes on the growth. If you believe the market will rebound, why not consider the Roth so you do not need to pay taxes on future gains? The Trump tax cut is scheduled to end Jan. 1 2026 and rates will most likely go up. With all of the current government spending the deficit is growing very quickly. Tax rates will have to go up in the future. This could make a conversion a good consideration.
The Cares Act allows tax relief from IRAs for “coronavirus-related distributions up to $100,000 taken between Jan. 1, 2020 and Dec. 31st, 2020. This exempts the 10% early withdrawal penalty. The law allows the taxes to be paid over three years and the money can be re-contributed during these three years. This provision could prove to be very dangerous to your retirement and most people should not do this.
First, most people do not save enough for retirement now. Why try to solve a short term problem with an answer that could affect many years of retirement? Many people will think they are going to re-contribute and may not be able to financially. You will not be earning on these funds while they are outside of your account. If they would have been invested in the stock market, much of the upturn happens usually early in a recovery. You will miss this big possible gain. Most people should not do this, but the ones who do are probably the less financial savvy.
We will get through this over the next month or so if people act responsibly. Testing is getting better, progress is being made on medical issues and the grocery stores are being restocked. None of us have ever experienced anything like this, but we will get through it if we all work together.
Your Financial Future is written by certified financial planner Gary W. Boatman, MBA and CFP, who also wrote the book, “Your Financial Compass: Safe Passage Through The Turbulent Waters of Taxes, Income Planning and Market Volatility.” If there is an area that you would like to see discussed in the column, send your suggestions to gary@BoatmanWealthManagement.com.