TO STAVE OFF the financial impact of COVID-19, the government has unleashed an unprecedented array of stimulus programs, tax law changes and other incentives to encourage economic activity. Result: There’s a slew of financial planning opportunities that can benefit almost all of us. Here are nine of them:
1. Refinance your debts. With the Federal Reserve’s recent rate cut, interest rates are now at their lowest level since 2008. These lower rates will take time to filter through the lending system, but they’ll eventually manifest themselves as lower rates on mortgages, car loans and even credit cards.
Now is a great time to consider refinancing existing loans, especially your mortgage. Indeed, if you have enough equity in your home, you might consolidate some of your higher-cost debt with a cash-out refinancing, using proceeds from your mortgage to pay off, say, your credit card balances.
2. Fund retirement accounts early. If you’re still working, consider accelerating contributions to your IRA, as well as to your 401(k) or similar employer-sponsored retirement plan. By completing your annual contribution earlier in the year, you’ll enjoy a longer period of tax-favored growth, plus your contributions will buy stocks at prices that are well off their previous highs. One caveat: If your 401(k) investments earn an employer match, confirm with your human resources department that changing the timing of your contributions won’t impact the match.
3. Check on your stimulus. The government is in the process of rolling out direct payments to taxpayers, with the amount received varying by income, marital status and number of dependents. Unsure if you’ll receive a payment? This link can show you how much your payment might be. Want to get your payment faster with direct deposit or, alternatively, check on your payment’s status? Go here.
4. Save on student loan interest. For federal student loans currently in repayment, the government has automatically suspended payments through Sept. 30. In addition, the interest rate on those loans has been temporarily set to 0%.
Don’t need the break from payments? If you continue to pay on loans during this period, 100% will go toward the principal balance. If you were on an automatic payment plan, and you wish to keep making payments, contact your loan servicer to turn the payments back on.
5. Watch out for school refunds and 529s. With educational institutions cancelling campus classes for the remainder of the school year, many are starting to refund the cost of room and board that are no longer being used. If these expenses were paid for out of a 529 plan, the refund needs to be redeposited into the plan within 60 days. Otherwise, it could be subject to income taxes and a 10% penalty.
It’s a good idea to do this the old-fashioned way: Send a paper check to the plan, along with a letter explaining the refund and the statement from the school showing the reason. This way, you have a paper trail if questions are ever raised.
6. File taxes later. The IRS has postponed the tax-filing deadline to July 15. This also extends the opportunity to make 2019 IRA and health savings account contributions until that date. In addition, estimated quarterly payments for both the first and second quarter of 2020 have been delayed until July 15.
What does all this mean? You have more time to reduce your 2019 taxable income with an IRA contribution. You can, for now, also hang onto the cash that would otherwise go to tax payments. Penalties and interest for late payments begin accruing on July 16, so make sure you’re ready to make your tax payment before then.
7. Tap retirement accounts early. If you or your spouse have been financially impacted by COVID-19, the IRS has suspended penalties on early withdrawals from IRAs and employer-sponsored retirement plans for amounts up to $100,000. The distribution is still subject to income tax, but the IRS is allowing taxpayers to spread out the taxable income over the next three tax years, 2020 through 2022.
If you take this distribution, you have the choice to recognize all the income in 2020, which could be a smart play if you’ll be in a low tax bracket this year, and you expect to move up to a higher bracket in 2021 and 2022. Even better, the IRS will let you repay the distribution over the next three years. If you do so, not only do you get to resume the tax-favored growth, but also you can reclaim any taxes paid on the distribution by filing an amended tax return.
8. Swap to a Roth. Now may be the ideal time for a Roth conversion. Let’s say you have a traditional IRA that was worth $200,000 but has since dropped to $100,000. If you convert $50,000 of the account to a Roth IRA, that $50,000 will be included in your 2020 taxable income.
In return for that tax hit, you’ll enjoy some key benefits. You’ve moved half of your traditional IRA to a Roth IRA, where future withdrawals will be tax-free, and you’ve done so when stock prices are depressed. You’ve also dramatically reduced the amount of future required minimums distributions from your traditional IRA.
9. Skip that distribution. The IRS has suspended required minimum distributions, or RMDs, for 2020. Want even more good news? If you’ve already taken your 2020 RMD, you can redeposit the funds within 60 days of the distribution and avoid the taxes. What if you’re outside the 60-day window, or if the RMD was taken from an inherited IRA or inherited 401(k)? The funds, alas, can’t be redeposited.
Peter Mallouk is president and chief investment officer of Creative Planning in Overland Park, Kansas. His previous article was An Ill Wind. Peter and HumbleDollar’s editor, Jonathan Clements, together host a monthly podcast. Follow Peter on Twitter @PeterMallouk.
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With respect to the RMDs, there’s some hope that the IRS or Congress will extend the 60-day window to roll distributions back in. I believe they did this the last time RMDs were suspended in 2009.