While financial downturns are not pleasant, nor welcome, they can present some financial opportunities that are worthy of consideration. We review a few financial strategies that could be beneficial to you, your family and loved ones during these challenging times.
Take Advantage Of Investment Opportunities
If you’re in a strong financial position and have resources such as cash and bond investments, this could be an ideal time to capture investment opportunities. It’s always better to buy stocks and other investments when prices are low, versus when prices are high. This is how the best long-term profits are created.
As an important word of caution, you should never invest in stocks unless you have at least a five-year investment time horizon. Additionally, you should carefully consider your potential cash needs over this timeframe to ensure you have ample resources in secure holdings such as savings, CDs and high-quality bonds.
Virtually everyone is spending less these days as millions of Americans are staying home. This is an ideal time to work on capturing additional savings from expenses you are foregoing such as dining out, retail shopping and travel. This is particularly important if you haven’t previously been diligent in doing so.
In terms of where to allocate savings, the first objective is always to build a secure emergency fund of at least three to six months of cash needs. Beyond that, consider long-term investment opportunities unless you expect to need the cash savings.
Refinance Your Mortgage
Interest rates have plummeted, potentially offering an opportunity to refinance your mortgage if you have one. Mortgage rates have been fluctuating rapidly along with the financial markets, so be careful to work with a reputable lender who can lock you in at a rate that makes sense.
One important caveat to refinancing is that you might need to execute documents in person. Consider your risk factors (age, health and medical condition) of coronavirus exposure as part of your refinancing decision. If nothing else, be sure to keep your physical distance from individuals at closing, use your own pen, and wash your hands immediately after leaving the office.
Harvest Investment Losses
If you own investments outside of qualified retirement accounts, look to see if you have unrealized capital losses. If the answer is yes, you might benefit from selling those assets to realize capital losses to reduce your taxable income.
The major caveat is that you should ideally reinvest the proceeds to avoid losing investment exposure, or assuming market timing risk. Just be careful to avoid a wash sale which is triggered by buying a substantially identical security, and thereby negates the tax loss.
Realized capital losses can be used to offset other realized capital gains and can reduce your taxable income by up to $3,000 per year. Any excess capital losses can be carried forward for an unlimited number of years.
Roth IRA Conversions
If your income is negatively impacted, or expected to be very low this year, a Roth IRA conversion might be a way to make lemonade out of lemons. Roth IRA conversions (where you convert traditional IRA assets into a Roth IRA) trigger taxable ordinary income. However, if your income is low, you might be able to convert retirement assets with zero to very little tax impact.
Conversions are particularly attractive for individuals who might have negative income this year as a result of owning a business that might operate at a loss or having large itemized deductions that exceed your taxable income.
We typically recommend deferring Roth IRA conversions until close to year-end, when you have the most information about your current year tax scenario. As a reminder, you can no longer recharacterize (or undo) Roth IRA conversion amounts, so it’s important to be confident about your decision before you act.
Skip Your 2020 Required Minimum Distributions
The recent CARES Act allows Americans to skip taking taxable required minimum distributions (RMDs), including inherited IRA distributions, during calendar year 2020. If you haven’t already taken your RMD, and you don’t need it to cover your expenses, consider foregoing it to reduce your taxable income.
Note: First-time RMDs can also be delayed, including your 2019 RMD if you opted to delay taking it until 2020.
Additionally, if you’ve already taken your RMD for 2020, you might be able to roll it back into the account within 60 days. Please check with your tax preparer and account custodian. (Note: This does not apply to inherited IRAs.)
Take Advantage Of Higher Charitable Deduction Limits
The CARES Act provides two changes to charitable deductions in 2020. Both only apply if contributions go directly to 501(c)(3) charitable organizations (not to charitable gift funds). First, it provides a new above-the-line charitable deduction for contributions up to $300. By “above-the-line”, this means that you’ll benefit even if you take the standard deduction and don’t itemize deductions. Furthermore, the Act now allows you to deduct charitable contributions up to 100% of your adjusted gross income in 2020 (up from the previous 60% limit). This threshold only applies to cash contributions (and does not apply to gifts of appreciated securities).
SageVest Wealth Management proactively works with clients to identify financial opportunities available to them. If you think one of these opportunities could benefit you, please Contact Us to discuss.
Most importantly, if you know anyone financially impacted by COVID-19, please share our advice on How To Manage Financially During The Coronavirus and Financial Help For Business Owners During The Coronavirus.