With the whirlwind of news we have been seeing in the past few weeks surrounding the economy, markets and the various impacts of COVID-19, I wanted to share a few thoughts and considerations relative to your personal financial and tax planning.
1) Taxes: you may have heard that the deadline to file your personal income tax returns has been extended to July 15, 2020. There has been much development in this area in the past few days but this extension applies to any payments originally due by April 15th as well as any tax filings due by April 15th. This applies to individuals, trusts, estate, partnerships and corporations. In addition, any payments due for the first quarter of 2020 have also been extended to July 15th. Luckily, there are no formal forms that need to be filed to take advantage of this extension! It is automatic! The one area to be cognizant of however, is that several states have not yet issued any guidance as to whether they will also follow suit with the IRS. Please be sure to consult with your accountant to ensure you are filing your tax returns and tax payments in a timely manner based on your local state guidelines.
2) Consult with your Investment Advisor: Be sure to reach out to your investment advisor to discuss your current investment portfolio as well as thoughts on preserving or deploying cash. Given the volatility in the markets, it may be an uncomfortable time for many individuals who are looking to retire in the near future and are relying on their portfolio as a source of income. On the contrary, for individuals who are opportunistic, this may be a time to start deploying some of your cash into the equity and fixed income markets. Consider dollar cost averaging into your investments rather than investing all at once. Stay in touch with your investment advisor to hear the latest news on the markets as well as their thoughts on constructing your portfolio in line with your risk tolerance.
3) retirement assets: in 2020, the IRS allows for you to contribute up to $19,500 into your 401(k). If you haven’t done so already, check in with your employer’s payroll department or Human Resources department to confirm how much you are contributing this year and whether you can still increase your contributions if you are not on target to meet that maximum contribution. Typically, your annual election for your 401(k) contributions is made at yearend so that is effective starting January 1st the following year. Many times, individuals contribute just enough to meet their employer match but you may want to consider contributing the maximum allowable by the IRS as these are pre-tax dollars that will grow tax deferred! In addition to contributing to your 401(k), you can also contribute up to $6,000 to a traditional IRA or a Roth IRA. A Traditional IRA allows you to contribute after tax dollars into a retirement account. These dollars grow tax free, but are taxed as ordinary income when you start drawing down on the account in retirement (the required minimum distribution age was recently increased to 72!). A Roth IRA however, allows for after tax dollars to grow tax free as well but are distributed tax free in retirement! The caveat with contributing to a Roth IRA is that once you hit a specific adjusted gross income level based on your tax filing status, you are not allowed to directly contribute to your Roth IRA. Because of this, many individuals contribute to a Traditional IRA. But did you know, you can do a back door Roth IRA conversion? If you are above the adjusted gross income level that precludes you from a direct Roth IRA contribution, you can contribute $6,000 into your Traditional IRA and “convert” (transfer) that to your Roth IRA. There are a few nuances that applies to this conversion so be sure to work with an investment advisor to assist you with working through the logistics and whether this is right for you.
If you have not done so already, you may want to consider contributing to your Traditional IRA or Roth IRA for this year given the market environment so that you can invest those dollars and take advantage of the tax free growth!
For those who have been funding their Traditional IRAs, you should consult with your investment advisor and/or accountant as well to determine whether this may be an opportunistic time for you to convert your Traditional IRA balance to a Roth IRA. Bear in mind this will have income tax implications but given the market decline, if this was a strategy you were going to consider at some point anyway, this may be a good time to revisit.
For those who are self-employed, rather than having access to a 401(k), you can contribute to a SEP-IRA based on your self employment earnings in a given year. Make sure to reach out to your investment advisor or accountant to ensure you are maximizing this benefit!
I hope the above thoughts and considerations are helpful. These are uncertain and unprecedented times but we will all get through this together!
