T HE H I D D EN O PPO RTUNI TI ES IN RECENT TAX POLICY CHANGES
TA B L E O F C O N T E N T S
INTRODUCTION Tax Volatility Can Uncover Financial Planning Opportunities.................3
THE SECURE ACT An Overview of What’s in the SECURE Act................................................. 5 What the SECURE Act Means If You’re Divorced...................................... 8
THE CARES ACT The CARES Act and What it Means for You............................................... 11 The CARES Act and You, Part Two.............................................................. 13
THINGS YOU CAN DO NOW 3 Tax Strategies for the 2020 Bear Market................................................15 6 Essential Tax-Loss Harvesting Tips...........................................................17 Without the Olympics, Chase Your Own Silver (Linings) .......................19
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. This material is not a substitute for professional tax advice or services, nor should it be used as a basis for any decision or action that may affect your financial situation. Before making any decision or taking any action that may affect your situation, you should consult a qualified professional advisor. Traditional IRA account owners should consider the tax ramifications, age and income restrictions in regards to executing a conversion from a Traditional IRA to a Roth IRA. The converted amount is generally subject to income taxation.
INTRODUCTION
TAX VOLATILITY CAN UNCOVER FINANCIAL PLANNING OPPORTUNITIES
BRIAN VNAK
Vice President, Advisory Services
For more than three decades, the American tax system remained relatively stable. Every few years, tax bills would pass that would primarily impact individuals in the top tax bracket and have little impact on most Americans. However, when the Tax Cuts and Jobs Act (TCJA) passed in 2017, we entered a period of tax volatility that could continue into the foreseeable future—that isn’t necessarily a bad thing, as long as you have a plan. Since 2017, Americans—and their tax preparers and financial planners—have felt the impact of several rounds of tax-law changes, including:
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Tax Cuts and Jobs Act The new law enacted sweeping reforms and impacted all taxpayers: individuals and families, businesses, trusts, non-profits and even state departments of revenue. The potential for an automatic reversal of many individual tax law changes in 2025, coupled with possible political shifts every two years, set the stage for continued tax volatility for years to come.
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State-Level Tax Reform Another major impact of the TCJA is its effect on state income tax laws. Since most states incorporate portions of the Internal Revenue Code (IRC) into their own tax laws, the TCJA also had implications at the state level. However, the implications vary from state to state, which left taxpayers with a lot of questions. In response to the TCJA, states began proposing or enacting legislation, adopting regulations and issuing guidance on the impact of various provisions of the TCJA.
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SECURE Act The Setting Every Community Up for Retirement Enhancement (SECURE) Act is the largest retirement-focused legislation in decades, impacting individual investors and the retirement plans they may have access to through employers. The SECURE Act also contains several smaller tax changes that are not retirement related. The bill is so far-reaching that everyone should review their financial plan to identify potential opportunities or landmines.
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Coronavirus-Related Stimulus With the passing of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, Congress reached a landmark agreement that provided more than $2 trillion in economic stimulus to individuals and businesses, including an individual tax rebate in the form of a cash payment. Additionally, the IRS postponed the 2020 federal income tax filing and payments deadline from April 15, 2020 to July 15, 2020 and many states followed suit. In addition, the CARES Act includes provisions that may not be as well known, so it’s important to familiarize yourself with all the nuances of this legislation.
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Tax Volatility Isn’t Going Away Another election is always just around the corner, whether it’s for state legislators or a presidential election year—and with that comes a certain amount of uncertainty. Tax law changes are inevitable, as elected officials come and go, so it’s best to be prepared. Start asking yourself or your advisor questions like:
What is the cumulative impact of these tax law changes on my finances?
How can I leverage new tax laws to minimize the share of my retirement assets that federal and state governments own?
What opportunities do the new tax laws present for potential savings now or in the long term?
Volatility Means Opportunity Major tax reform is not simple, and issues are bound to pop up. But where there is volatility, there is also opportunity. Just like how stock market volatility can present opportunities to buy and sell investments, tax volatility could create opportunities to restructure your financial plan to improve your current tax situation. All the turnover is bound to be a bit confusing, even for the experts, so be sure that you’re working with your financial advisor and tax specialists to stay up to date with new opportunities.
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T H E S E C U R E AC T
AN OVERVIEW OF WHAT’S IN THE SECURE ACT
BRIAN VNAK
Vice President, Advisory Services
The SECURE Act is the largest retirement-focused legislative reform in decades. Its provisions impact individual investors and the retirement plans they may have access to through employers. These changes were intended to improve access to and attractiveness of retirement plans to help address Americans’ growing concerns over their ability to save for their own retirement. While many provisions are small (and potentially not applicable to many individuals), the breadth of the bill is such that all workers, investors and retirees will need to review their financial plans to ensure that potential opportunities are seized and landmines are averted.
Retirement Provisions Impacting Individuals RMD Age Changes to 72
Beginning in 2020, the SECURE Act raises the age at which retirees must start required minimum distributions (RMDs) from 70 ½ to 72. Individuals who reached 70 ½ in 2019 will continue to fall under the old rules and need to continue RMDs.
“Stretch” IRA Provisions Replaced by 10-Year Rule
This new rule requires non-spouse beneficiaries to distribute the full amount in the qualified account (IRA, 401(k), etc.) within 10 years. There is no “account minimum” exempt from this rule, however, spouses, minor children of the deceased, disabled and chronically ill individuals are exempt. This rule applies to inherited accounts where the owner died in 2020 or later. Individuals who inherited an account prior to 2020 will remain subject to the pre-SECURE Act laws and regulations and be able to “stretch” distributions and taxes owed over the their lifetime.
IRA Contribution Rules Expanded
The SECURE Act eliminates the age limit on Traditional IRA contributions. As long as you have earned income, you can continue to make deductible or non-deductible contributions to a Traditional IRA, regardless of your age. Additional changes now provide graduate students increased opportunities for tax-deferred saving. Graduate students can now count taxable stipends and non-tuition fellowship payments as earned income for the purposes of making Traditional or Roth IRA contributions.
Penalty-Free Withdrawals for Birth and Adoption Expenses
Under the SECURE Act, individuals will be allowed to withdraw up to $5,000 penalty-free from retirement accounts to help cover birth and adoption expenses. While penalty-free, distributions will remain taxable.
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Non-Retirement-Related Provisions Kiddie Tax Trust Rates Repealed
The SECURE Act repeals changes to the kiddie tax put in place by the TCJA in 2017, which made the investment income taxable at trust rates. Going forward, the “old” kiddie tax laws will apply, meaning that the child’s tax will be based upon the parents’ tax rates.
New 529 Plan Distribution Options: Student Loan Debt & Apprenticeship Programs
The SECURE Act now permits 529 plans to be used to repay student loan debt. Parents can now withdraw up to $10,000 per 529 plan beneficiary over their lifetime to repay student loans. This offers additional planning opportunities by expanding what qualifies for a tax-free distribution for 529 plans. Another 529 plan change included in the SECURE Act allows for tax-free 529 plan distributions to pay for apprenticeship programs if the program is registered and certified with the Department of Labor. Eligible program expenses include fees, books, supplies or required equipment.
Changes Impacting Retirement Plans Tax Credit for New Retirement Plans
The SECURE Act gives employers a tax credit for startup costs related to establishing an employer plan (up to $5,000). The company would be eligible for a $250 tax credit per non-highly compensated employee (non-HCE) at the company, up to a maximum of 20. For example, an employer with at least 20 non-HCEs would qualify for the full $5,000 credit ($250 x 20). This credit can be claimed for up to three years.
Tax Credit for Automatic Enrollment Provisions
Under the SECURE Act, a new $500 credit is offered for the first year a small business adds an “auto-enrollment arrangement” to their plan. Additionally, Congress increased the maximum auto-enrollment contribution percentage from 10% to 15%, effective in 2020. This credit can be claimed for up to three years.
Expanded Opportunities for Multiple Employer Plans
Multiple employer plans (MEPs) allow at least two unrelated employers to maintain a retirement savings plan while sharing the administrative costs. But, under current rules, if one plan member fails to fulfill its obligations, the entire plan would be disqualified. The SECURE Act makes these plans more attractive to participating employers. Beginning in 2021, after IRS rule changes, only the disqualified member would be penalized, while the rest of the plan maintains its qualified status.
New Savings Opportunities for Part-Time Workers
Part-time workers who work more than 500 hours for three or more consecutive years will be eligible to contribute to 401(k) employer plans. While this requires eligibility, it does not require employers to make matching contributions for this type of employee. Since this law begins in 2021 and requires at least three years of employment, part-time workers won’t be eligible to contribute until 2024.
Increased Access to Annuities in Employer Retirement Plans
The SECURE Act clarifies and eases the fiduciary rules related to the liability associated with offering annuities within an employer retirement plan. Additionally, the SECURE Act creates portability for annuities purchased within a plan.
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Goodbye 401(k) Credit Cards
Plan participants will no longer be allowed to borrow from their 401(k) with credit card loans. Some plans used to allow 401(k) loans to be offered via a credit card, however, it wasn’t clear that the credit card loans had to be repaid. The SECURE Act eliminates these types of loans.
Certain Laws Didn’t Change Over the last five years, Congress had proposed multiple retirement bills that contained similar provisions to the SECURE Act, but many did not make the final bill. The following are items that were not modified by the SECURE Act and continue as they are under current law: Qualified Charitable Distributions (QCDs) The age at which you can make QCDs remains the same: 70 ½. It does not increase to the new RMD age of 72. This lack of a law change provides individuals the opportunity to make financially smart charitable contributions before and after their RMDs begin. Life Expectancy Tables While the SECURE Act changed the starting age for RMDs from 70 ½ to 72, the life expectancy tables used to determine the amount of the RMD remain the same. That said, the IRS has separately proposed revising these tables, which, if approved, may impact RMDs beginning in 2021. This article was originally published on January 28, 2020.
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T H E S E C U R E AC T
WHAT THE SECURE ACT MEANS IF YOU’RE DIVORCED
CHRIS SCHIFFER
Senior Vice President, Financial Advisor
Although the SECURE Act is often discussed as one of the largest retirement-focused legislative reforms in decades, it included a number of implications for individuals who are divorced or facing a divorce. While the law isn’t directed specifically to divorcing spouses, it’s important to understand these changes given that retirement accounts are a significant consideration in most divorce matters. Some of the SECURE Act provisions that will most likely impact divorcing spouses are as follows.
“10-Year Rule” for Non-Spouse Heirs Perhaps one of the most significant impacts the SECURE Act has on divorcing or divorced individuals is the elimination of the so-called “stretch IRA.” This allowed beneficiaries to stretch RMDs over their lifetimes on inherited Traditional IRAs, Roth IRAs and qualified retirement plans. Under the new “10-year rule,” non-spouse beneficiaries who inherit one of these accounts in 2020 or later are now required to withdraw all assets from the inherited account within 10 years following the death of the original account owner. EXCEPTIONS TO THE 10-YEAR RULE INCLUDE: 1. Surviving spouse 2. Minor children—only until the child reaches the age of majority; then, the 10-year rule applies 3. Disabled individuals—the beneficiary must meet the strict definition from the tax code stating that an individual is unable to work for a long or indefinite period and prove long-term disability 4. Chronically ill—the beneficiary must meet the definition from the IRS tax code which requires certification by a professional that the individual is unable to perform at least two activities of daily living for at least 90 days or requires “substantial supervision” due to cognitive impairment 5. Similar age individuals—the beneficiary is not more than 10 years younger than the IRA or retirement plan owner (e.g. siblings)
Usually, individuals select their spouse as the primary beneficiary and their children as contingent beneficiaries. However, in a divorce situation, the children are often named as primary beneficiaries. Distributions may be made in any amount over the 10-year period, as long as the IRA or retirement account is entirely depleted by the end of the tenth year. Compressing distributions into a 10-year period creates tax implications for the non-spouse beneficiaries, since withdrawals from Traditional IRAs and other retirement plans are taxed at the beneficiary’s ordinary income tax rate.
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However, for those who don’t necessarily need to tap into their IRA or retirement plans for living expenses in retirement, there may be tax planning opportunities. Since your income, and thus your tax bracket, typically declines as you enter retirement, there may be opportunities to manage the timing of distributions from retirement accounts to take advantage of lower tax brackets. Additionally, the beneficiary’s tax rates may differ significantly from the original account owner’s, but tax rates could also differ between beneficiaries. It might make more sense to designate taxable account assets to heirs in a higher tax bracket and IRA and retirement assets to beneficiaries in a lower tax bracket. It is also important to evaluate whether conversion to a Roth IRA may make sense to meet the account owner’s goals. Conversion to a Roth IRA allows the taxes to be paid by the account owner while the beneficiary recipient will inherit a non-taxable asset.
Trusts as Beneficiaries
If a trust is a named beneficiary, the two typical types of trusts utilized are conduit trusts or discretionary trusts. Many conduit trusts are drafted in a manner that only allows for the RMD to be disbursed from an inherited IRA to the trust each year, with a corresponding requirement that the same distribution be passed directly out to the trust beneficiaries. In light of the changes made by the SECURE Act, for those beneficiaries now subject to the 10-year rule, where there is only one year where there is an RMD, the tenth year results in all the taxable income being pushed to that tenth year! Conduit trusts drafted with language similar to that referenced above might not allow the trustee to take any distributions of the inherited account until the tenth year after death—because prior to that tenth year, any IRA distributions would be “voluntary.” Then, in the tenth year, the entire balance would have to be distributed in that single year to the trust and be passed entirely along to the trust beneficiaries as a mandated RMD that under the conduit provisions must be passed through. The end result could be a very high tax bill to the heir(s), as the entire value of the retirement account is lumped into a single tax year as a distribution to the beneficiary. In addition, there is a loss of any protection provided by the trust for such assets, since they are distributed from the trust. Discretionary trusts may not fare much better, if at all. Such trusts often require that all, or a substantial portion of retirement account distributions, remain in the trust—not distributed to the trust beneficiaries. In such circumstances, amounts retained by the trust are subject to trust tax rates, which are highly compressed as compared to individual tax rates. In short, any trusts that are named as beneficiaries should be reviewed to make sure the funds are being transferred according to the original account owner’s wishes.
Annuities in 401(k) and Other Retirement Plans The SECURE Act increases the availability of annuities in employer retirement plans. This is something to be considered, since some annuities may not be divided between spouses, complicating Qualified Domestic Relations Orders (QDROs) that split retirement plans. Annuities in retirement plans should be considered a separate item when drafting any Marital Separation Agreement (MSA) to avoid the headaches of trying to amend an MSA.
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Contribution Age Eliminated for Traditional IRAs The SECURE Act eliminated the age limit of 70 ½ for making contributions to a Traditional IRA. Now, as long as a person has taxable compensation (e.g. wages, salaries, commissions, tips, bonuses, or net income from self-employment), they can make contributions. Taxable alimony received has traditionally been treated as compensation for IRA contribution purposes. However, under the TCJA, alimony received is no longer taxable income. Divorcees over age 70 ½ that have taxable compensation and/or began receiving taxable alimony under the pre-TCJA rules have the option to contribute to either a Roth IRA or a Traditional IRA. The limit for contributions to Traditional and Roth IRAs is $7,000 if you are older than 50. However, Roth IRA contributions are also limited by the amount of income you earn. Single individuals earning more than $124,000 in 2020 have their Roth contribution limit reduced.
What the SECURE Act Means for You Your situation is unique to you, and the SECURE Act’s implications can be complex depending on your specific situation. That’s why it’s important to review your situation to understand what these changes mean for you and your financial plan.
This article was originally published on February 13, 2020.
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T H E C A R E S AC T
THE CARES ACT AND WHAT IT MEANS FOR YOU
BRUCE HELMER
Founder, Financial Advisor
The Coronavirus Aid, Relief and Economic Security (CARES) Act has been signed into law. The $2 trillion legislation is intended to provide a boost to everyone impacted by the COVID-19 pandemic, which is, well, everyone. It probably feels impolite to ask “what’s in it for me?” So, in a rare two-part series (one for every $1 trillion), we’ll go ahead and answer for you.
Immediate Relief Let’s breathe a collective sigh of relief. The tax deadline has been moved back to July 15 (federally, and in 34 states). This is automatic, with no extension required and no penalties incurred. But this is more than just another procrastination opportunity. Contribution deadlines for eligible accounts, including IRAs and HSAs, have also been pushed back. Of course, the marquee provision of the bill is a one-time cash payment in the amount of up to $1,200 for individuals, $2,400 for couples and $500 for every child. The amount begins to phase out depending on adjusted gross income (AGI), starting at $75,000 for single-filers and $150,000 for couples filing jointly, with a complete phase out at $99,000 and $198,000, respectively. The amounts are based on 2019 tax returns, or 2018 returns for those who have not yet completed their 2019 returns. If your income was higher in 2019 than in 2018, consider holding off on filing your tax returns, as there is no “clawback” provision requiring you to pay back the money based on 2019 returns. If you anticipate being on the cusp of the cutoff in 2020, consider taking steps to reduce your AGI this year.
A Reprieve From RMDs 2020 RMDs were based on account values from 2019, which hardly seemed fair given what those accounts are worth today. As such, RMDs are suspended for IRAs and defined contribution plans (including beneficiary plans) for 2020. Unless you need the money for cash flow purposes, we recommend leaving it to avoid an unnecessary tax burden. If you already took your RMD, there are some options as well. Be sure to talk with your advisor about the best options if you have already received an RMD for this year.
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Enhanced Accessibility For those who have been personally and directly impacted by COVID-19, it is possible to withdraw as much as $100,000 from a 401(k) or IRA without penalty. What’s more, the tax liability from the withdrawal can be spread out over three years, and the money can be put back into the account over that same time frame without penalty. This benefit is limited to those with a COVID-19 diagnosis or diagnosis in the immediate family, those who have experienced a change in work circumstances (job loss, loss of business, etc.) as a result of the disease, or who are unable to find childcare and cannot work for that reason. Further, it might not be wise to defer tax liability if you are likely to be in a higher income tax bracket next year. It’s a familiar refrain, but these are complicated matters, and even the authors of the bill are working to clarify its intent. This is a great time to reach out to your advisor and ask what the implications of this legislation might be for you and your retirement goals.
This article was originally published in the Pioneer Press on April 4, 2020.
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T H E C A R E S AC T
THE CARES ACT AND YOU PART TWO
PEG WEBB
Senior Vice President, Financial Advisor
The Coronavirus Aid, Relief and Economic Security (CARES) Act has been in effect since April. This is the second part of our analysis of the $2 trillion legislation and how you can take advantage of it.
The Paycheck Protection Program for Small Businesses The flagship provision for small businesses is the Paycheck Protection Program (PPP), which offers loans at 1% interest to businesses impacted by COVID-19. It also provides up to eight weeks of forgivable loans to cover payroll, health insurance premiums, rent and utility payments. The loan can be for an amount up to 250% of an employer’s average monthly payroll, and the loan forgiveness component is not taxable. Notably, independent contractors and self-employed workers can take advantage of the program, as owner draws and distributions are considered payroll for the purpose of obtaining one of these loans.
“ Of course, the idea behind these loans is to protect jobs, so there are stipulations to that effect. Most
importantly, employers must maintain existing staff or rehire employees in order to be eligible for debt forgiveness for the eight weeks following the date of the loan.
For this reason, you may need to think about how to creatively utilize staffing resources until the economy is back up and running. Disaster assistance, enhanced debt relief and other options are available as well, and participation in the PPP may make you ineligible for other CARES Act provisions. This would be a good time to schedule a meeting with your banker or lender to determine if the PPP provisions make sense for your business.
Enhanced Unemployment Benefits It’s no secret that the shutdown of non-essential businesses has had a dramatic impact on employment. Congress recognized the unique circumstances the coronavirus pandemic has put us in and has greatly augmented unemployment benefits available to impacted workers. The CARES Act provides an additional $600 in weekly benefits to unemployed workers on top of their regular benefit. This applies across the board, even if the benefit amount exceeds the worker’s rate of pay prior to losing their job. Benefits have also been extended by 13 weeks, even for those whose unemployment benefits had expired. The plan also expands eligibility. Self-employed workers and contractors are eligible, as are people who have become breadwinners due to a death in the family from COVID-19, people who quit their jobs due to COVID-19, and people forced to quit to care for dependents at home.
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Benefits are broadly subject to the typical unemployment regulations. In general, you must be available to work, and you must be pursuing gainful employment. But if you lose your job, this will give you some breathing room in terms of depleting your emergency fund.
Relief From Debt Payments For those impacted by the coronavirus, there is penalty-free deferral of payments for up to 180 days on federally backed mortgages. Doing so will not incur any interest, penalties or late fees, and the deferral will not be reported to credit agencies. Further, no payments are required on federal student loans through September 30, 2020. While all of these provisions are intended to provide relief, they all come with a catch. Knowing what is available is half the battle. Working with your advisor to determine which provisions gel with your financial goals is the other half.
This article was originally published in the Pioneer Press on April 18, 2020.
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T H I N G S YO U CAN DO NOW
3 TAX STRATEGIES FOR THE 2020 BEAR MARKET
PETE HOGLUND
Senior Vice President, Financial Advisor
When markets take a tumble, it’s easy to get caught up in headlines. But it’s important to take a step back and think about the broader context surrounding the bear market. The good news is that, even in a market that saw the quickest fall in history, there are some opportunities for you to proactively reduce your tax bill for next year:
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Utilize Tax-Loss Harvesting
With a bull market lasting a remarkable 10 years following the last recession, chances are you haven’t done much with tax-loss harvesting recently—but now you could. Tax-loss harvesting cannot restore losses, but it can mitigate them. No one likes to experience investment losses, but you could have the opportunity to use those losses to offset future capital gains, thereby avoiding capital gains taxes down the road. In short, you can sell Security A at a loss to offset the capital gains tax liability on Security B, lowering your personal taxes, assuming the sales meet certain conditions. That said, the effectiveness of tax-loss harvesting can vary depending on the composition of your portfolio. If you need cash and are thinking about withdrawing from your portfolio, work with a financial advisor to consider how to strategically sell assets, even if it’s at a loss, in order to help set you up to turn lemons into lemonade.
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Maximize Waived 2020 RMDs
With the passage of the CARES Act, required minimum distributions (RMDs) from regular and inherited IRAs and defined contribution plans (401(k), 403(b), etc.) are suspended for 2020. If you do not need your RMD to fund your lifestyle expenses, you are encouraged to not take the RMD, which may mean stopping future monthly distributions or automatic annual processing of your RMD. By forgoing your RMD this year, you’ll have more money invested to take advantage of any gains in value following the down market. Skipping RMDs may also put you in a lower tax bracket, which gives you the chance to make some creative choices. For example, you could use this opportunity to talk to your financial advisor about taking advantage of Roth conversions, selling appreciated stock or other assets, or distribution planning.
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Strategize for Tax Efficiency
It’s easy to get “stuck in our ways” when it comes to our asset class allocations and tax treatments. But now is a good time to review your investments with your financial advisor to discover any tax inefficiencies. For example, if you’re holding stocks that consistently pay out dividends, it could be in your best interest to hold them in qualified accounts to avoid paying income tax rates on dividend income.
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On the other hand, municipal bond interest is typically tax-free and could be more useful in taxable accounts than qualified ones. Maybe you’ve already talked about this with your advisor in the past and decided that relocating didn’t make sense then, but now is the time to revisit these asset allocation conversations. That’s because during market volatility, you might find opportunities for repositioning that were not there in a bull market. While no one likes to see the markets take a dip, the current bear market does provide some strategic opportunities that you could take advantage of. Make sure you’re in contact with a financial advisor to help ensure you are making the most of these circumstances to plan for your future. This article was originally published on May 5, 2020.
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6 ESSENTIAL TAX-LOSS HARVESTING TIPS
CHRIS HAARSTICK
Director of Investments
With the recent extensions of federal tax filing and payment deadlines, your taxes may not be due until July. But now might be a good time to think about “tax-loss harvesting” to limit the recognition of short-term capital gains that are typically taxed at a higher federal income tax rate than long-term capital gains. Tax-loss harvesting cannot restore losses, but it can mitigate them. In short, you can sell Security A at a loss to offset the capital gains tax liability on Security B and lower your personal taxes—if the sales meet certain conditions.
With that in mind, here are six essential tax-loss harvesting tips: 1. You Don’t Need to Wait Until the End of the Year You might think you have until the very end of the year to address this situation, but as far as the tax year goes, you don’t. This is because the IRS does not approve of buying and selling an asset simply to lower your taxes. Called the “wash-sale rule,” a loss will be disallowed if the same asset/security is sold for a loss and repurchased within 30 days (as you must report on Schedule D of the 1040 tax form). In certain cases, that 30-day period can expand to 61 days or, if you want to stay invested in the same security after declaring a loss, 30 days after the initial purchase date and then another 30 after the date of the sale. Let’s say you love a certain stock and want to stay in it for the long haul, but right now the stock is down substantially from your purchase price. To avoid a wash sale, if you bought it more than 30 days ago, you can sell it, otherwise you need to wait for those 30 days to elapse. Then, you need to wait 31 more days before you can repurchase it. However, if you simply want to stay invested in the same sector (say, software and services), you do not need to wait to reinvest the same dollar amount in an equivalent asset. So, you could take the proceeds from that first stock sale and at any time invest them into another stock in that sector. 2. Leverage Bouts of Market Volatility While no one likes to see their balance fluctuate during periods of market volatility, if you have significant losses in your portfolio, you can “bank” those losses now to offset future gains as the markets recover. Measure the gains and losses now (or have your financial advisor do it) and keep an eye out for moves in those securities over the next month or so to enhance your opportunity to make a tactical exit.
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3. There is No Limit on Losses You Can Harvest There’s no limit on the amount of capital losses that can be applied against capital gains. However, only $3,000 of it can be applied against ordinary income for the tax year with the balance carried forward. That said, the time value of money means that the tax liabilities in the future should be less costly than the liabilities you face now. 4. The Wash-Sale Rule Applies Across Your Portfolio You need to apply the wash-sale rule across your portfolio, including non-taxable accounts and spousal accounts. This means if you sell individual holdings of a certain stock, you cannot buy another block for your IRA or your spouse’s IRA without waiting until 30 days after the sale. It also means that if you recently purchased a security for your IRA, you need to wait 30 days before selling individual holdings of it in a taxable account to receive the full amount of capital loss. 5. Watch Your Transaction Costs While we are all about maximizing tax efficiency, it makes no sense to throw cost efficiency out the window in an attempt to reach maximum tax efficiency. Buying and selling have transaction costs that need to be balanced with how much you can save in taxes. 6. Its Effectiveness Depends on Your Portfolio The effectiveness of tax-loss harvesting can vary depending on the composition of your portfolio. For instance, if you’ve taken a look over your investment portfolio’s performance this year, you likely have registered some gains in equities and may have some losses in fixed income. In such a case, you might consider selling some fixed income assets, as well as any stocks that have dropped substantially. The overall goal, of course, is to keep more of what you make. It’s not too late to prepare and take steps to optimize your portfolio for tax efficiency. When the market hands you lemons, Uncle Sam allows you to turn it into lemonade by creating a tax benefit. If you have more questions about tax-loss harvesting, we’re here to help. Reach out to a financial advisor today to get a clearer understanding of your tax-loss harvesting options. This article was originally published on April 23, 2020.
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WITHOUT THE OLYMPICS, CHASE YOUR OWN SILVER (LININGS)
BRIAN VNAK
Vice President, Advisory Services
The silver lining of a cloud is not actually silver but sunlight diffracted by cloud droplets on the periphery. The darker and denser the cloud, the more prominent the silver lining appears to be. Hence the metaphor. So, when we talk about silver linings in a down economy, we do so with the knowledge that there is, in fact, light behind the cloud. When we invest, we do so knowing that the fundamentals of our economy are sound. With this knowledge, we can use both the clouds and the linings to our advantage.
SILVER LINING #1: Roth Conversions The coronavirus caused a major market downturn and probably took your retirement account balances with it. For those who have an IRA, you have likely seen years of gains offset by this recent period of loss. That’s the cloud. But we know there’s light. Historically, markets have bounced back from even the worst economic plights. So, let’s take advantage of the cloud and perhaps consider a Roth IRA conversion. When converting a Traditional IRA to a Roth IRA, you pay income taxes on pretax funds in your conversion year. This can move you into a higher income tax bracket, reduce deductions and credits, and impact Social Security benefits as well as Medicare premiums. That’s a cloud in and of itself. Of course, there tend to be very good reasons to do a Roth IRA. The silver lining is the benefit of being able to take tax-free distributions, even on earnings from your investments. This was already a pretty good time to do a Roth conversion, as tax reform eliminated AMT considerations for most people and lowered tax rates on the conversions themselves. Those tax rates are set to expire in 2025, so the window is closing. While it certainly doesn’t feel great to see your IRA account balance go south, doing a Roth conversion when markets are down provides additional savings. Your tax bill is based on the value of the IRA account at the time of conversion. This is one of those rare instances where it makes perfect sense to “time the markets.” When the market rebounds (the light behind the cloud), those earnings will be tax-free. If you have seen a change in income as a result of the coronavirus, the cloud is darker, but the opportunity is brighter. Taking your Roth conversion when your income is lower means you could potentially pay taxes in a lower bracket, and potentially have more losses to offset your gains. There are, of course, several considerations before opting to do a Roth conversion. If, as might be the case in these troubled times, you need your IRA money for living expenses, now might not be the best timing. If you anticipate being at the phase-out threshold for emergency relief as part of the CARES Act, that might also give you pause.
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It’s worth noting that you don’t have to take the entirety of your Roth conversion right away. You can do one portion now and one portion later. Market volatility will likely be with us, at least in the short term, so there are likely to be opportunities to benefit from market timing down the road.
SILVER LINING #2: Tax Deadline Relief If procrastinating is your jam, you got a nice big silver lining from the IRS in the form of a tax deadline filing extension. The deadline was moved back to July 15, 2020 for individuals, gifts, estates, trusts, corporations, foundations and partnerships. But beyond giving you more time to prepare, there are some potential economic benefits. The IRS also moved back the second quarter estimated tax payment deadline (which was originally June 15, 2020), making both Q1 and Q2 estimated tax payments due on July 15, 2020. This applies to individuals, trusts and corporations. The July 15 extension also applied to the IRA and HSA contribution deadline for 2019 contributions. If your circumstances changed and a move to lower your tax bill from 2019 now makes sense, this is an opportunity you should consider if you have not yet reached the contribution limit ($6,000 or $7,000 for those 50 or older). It’s also worth noting that the change in deadline only applies to federal tax returns. While almost all states have additionally passed their own 2019 filing relief, note that it’s not always the same July 15, 2020 date. A few are sooner, so make sure you understand your exact filing deadline. Additionally, many states have not completely aligned with the federal deferral on 2020 estimated tax payments. Understanding these estimated tax dates is especially important if you typically rely on tax withholding from RMDs. Since the CARES Act waives the need to make 2020 RMDs, it won’t be necessary to take the RMD and the resulting tax withholding. But the government will still want to collect tax, so making estimated tax payments may be a new process this year in lieu of the RMD tax withholding.
SILVER LINING #3: Stuff is Cheaper The markets are looking awfully cloudy these days. It appears that investors are pricing the impact of COVID-19, and the short-term outlook isn’t great. On the other hand, stocks are on sale! While you shouldn’t attempt to time the markets, now might be a good opportunity to rebalance your portfolios. Portfolio rebalancing is all about selling off assets that went up and buying assets that went down. It’s well worth checking in with your advisor to see how your portfolio looks in light of your investment goals. Investments aside, big ticket items are available at a discount right now. If you need a new car soon (even if you can’t drive it regularly) and are reasonably secure in your income, now would be an advantageous time to look into one. At minimum, know that you are negotiating from a position of strength when it comes to price. Don’t be afraid to walk away, and not just for social distancing reasons.
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As you probably heard, mortgage rates are near all-time lows. Perhaps you dismissed the idea of refinancing based on the conventional wisdom that you should only refinance if you can reduce your rate by 1% or more. This might be a mistake. First of all, let’s look at the simple math. If the amount you can expect to save in monthly payments in the short term will cover closing costs, it’s probably a good decision to refinance, regardless of rate. Further, if you have private mortgage insurances, and your house has appreciated, you may be able to reduce or eliminate that component of your mortgage payment. If your house has appreciated in value, it might be worth cashing out and using the money to pay down bad debt, such as credit card debt. Otherwise, you can use the lower monthly payment to put money aside for an even rainier day.
Time for a Gut Check Before reaching for the silver lining, it’s important to ask yourself a few questions: Can I afford a Roth conversion? While the economy is in rough shape and markets are volatile, paying off Uncle Sam may be just the right counter punch. Are my financial circumstances likely to change in the short term? You don’t want to make a major decision if the assumptions behind them could fall underneath you. Am I investing enough to meet my retirement goals? Any time the markets are down, it’s a good time to look at your portfolio and make sure you are setting enough aside for the retirement you want.
This article was originally published in Kiplinger on May 8, 2020.
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Advisory services offered through Wealth Enhancement Advisory Services, LLC (WEAS), a registered investment advisor. Certain, but not all, investment advisor representatives (IARs) of WEAS are also registered representatives of and offer securities through LPL Financial, member FINRA/SIPC. Wealth Enhancement Group and WEAS are separate entities from LPL.Wealth Enhancement Group is a registered trademark of Wealth Enhancement Group, LLC. 1-05020821 6/2020
