During the course of 30+ years in the financial planning industry, I have coached clients through the 1987 crash, the end of the Dot-Com era, the Sept. 11 terror attacks, and the 2008 Financial Crisis.
I can’t say I have coached my clients through a quarantine. This is a new one.
While you are stuck at home, there are plenty of things you can be doing to keep your financial plan on the right track. Below are the top three things I am doing for clients right now—aside from buying stock while the market is down.
But first, a few quick housekeeping items for clients:
- If “stay-at-home” orders have impacted your job and you are concerned about cash flow in the upcoming months, call the office: (973) 966-6939. We are here to help.
- Federal Tax Day has been moved to a new filing deadline of Wednesday, July 15, 2020, regardless of the amount owed. This extension is automatic to all Americans—no paperwork required. This new tax deadline does NOT apply to payroll taxes, estate taxes or excise taxes.
If you are paying estimated quarterlies: This new tax deadline applies to first-quarter taxes, which are normally due on April 15, but can now be made as late as July 15 without penalty. Be careful though: the deadline for estimated quarterly taxes normally due on the second-quarter deadline of June 15 remains the same. So, don’t miss that deadline by accident!
This extension does not apply to state taxes. While most states have chosen to extend their filing deadlines, the dates will vary by state. New Jersey has extended the deadline for income tax and corporate tax filings to July 15th, consistent with the new federal deadline.
And, now, without further ado …
3 Financial Planning To-Dos During the Coronavirus Quarantine
1) Tax Loss Selling
Tax loss selling is the practice of selling stocks, bonds, mutual funds, and other investments at a loss to reduce your capital gains tax burden. Capital gains are the profits earned from the sale of an investment or property. Investors can deduct up to $3,000 of losses per year and carry any remaining losses over to future years.
Capital gains are taxed differently depending on your tax bracket and the length of time you held the investment. When you select investments for tax loss selling, it’s best to choose the same type of investment to offset the gain (i.e., a short-term loss to offset a short-term gain; and a long-term loss to offset a long-term gain).
The deadline for tax loss selling is Dec. 31, but there is no reason why you have to wait until the last week of the year. It can happen at any time. So, let’s do it now while the market is down!
Avoid Making a “Wash Sale”
It might sound tempting to sell an investment at a loss, take the tax deduction, and then repurchase the investment to reap the benefits of a recovery. Unfortunately, the IRS is one step ahead of you.
You are not allowed to sell an investment at a loss for tax purposes, then repurchase that same investment (or a substantively identical one) within 30 days of the initial trade. This practice is called a “wash sale” and it is prohibited by the IRS. If your spouse or your business makes the purchase, it is still considered a wash sale.
Instead, you can sell investments at a loss, then buy an asset similar—but NOT the same—to eliminate the chance of being in cash when the uptick happens.
2) Keep Investing
Unlike when you hike the National Parks, don’t play dead just because the Bear arrived. Keep investing and buy the bargains. As Warren Buffett once said, “Every decade or so, dark clouds will fill the economic skies, and they will briefly rain gold.”
If possible, increase your 401(k) and 403(b) contributions by 1-2% for the next few months. Up your 529 college savings plan contributions for the kids and grandkids.
Fund your 2019 IRAs and self-employed retirement plans, and remember—you can fund 2020 right now as well. Most self-employed people wait until their CPA gives them the number to contribute into their retirement plan. If you don’t have that number yet, let’s estimate 80% of it, and then consider doing 50% of it for 2020. Don’t wait until March 2021 to make your 2020 contribution, make a portion of it NOW.
It’s 2020 … Let’s double down!
3) Roth IRA Conversion
Most clients already know I am not a huge fan of the Roth IRA, because I would rather get my tax deduction right away on the contribution side. However, converting a traditional IRA to a Roth IRA can have major tax benefits.
Will federal income taxes ever be lower than they are right now after the 2017 tax reforms? Who knows?
Here is what we do know: Roth IRAs grow tax-free, do not tax qualified withdrawals, and do not have “required minimum distributions” for those age 72 and above. By converting to a Roth IRA, you can take advantage of low tax rates right now, and avoid worrying about possible tax hikes down the road.
You will be taxed one time for a Roth IRA conversion. Your traditional IRA funds will be considered “income” for tax purposes ONLY in the year of the conversion. Now would be the ideal time to get this over with, because tax rates are low—and likely your IRA accounts are too.
That doesn’t sound like a good thing, but it actually is for this purpose. The lower your account value, the less income you are considered to have for the conversion—which means the LESS you will pay in taxes. Take advantage of your traditional IRA account values while they are down. If you are thinking about a Roth IRA conversion, do it now while you have less taxable funds in your account.
Call the office to determine if you are a good fit for this strategy. Conversions cannot be undone, so we want to make sure it would be appropriate for your existing cash flow and liquidity needs.
Stay safe, keep washing your hands, and remember this bizarre moment in history is temporary. This too shall pass, and when it does, you will be glad some of the down time was used to make financial lemonade out of some pretty sour lemons.