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Three Ways to Take Back Financial Control during COVID-19 Uncertainty

Photo of author, Frank Neiderhiser, CFP®.
Frank Neiderhiser, CFP®
Regional Manager and Financial Strategist

COVID-19 has impacted the modern world like nothing before. During such stressful times, it is natural to feel a loss of control in both our personal lives and our investment portfolios. Some investors will even refuse to open their statements fearing the loss that has occurred. Others will watch CNBC all day hoping the market recovers. While another group may give up on investing all together. To help recover your sense of control, here are three actions to consider.

#1 Rebalance your portfolio. Through the record bull market over the past 10 years, you have likely been capturing gains from your equity holdings and reallocating to fixed income holdings like structured notes and bonds. Well it's time to reverse that action. Reallocating assets from bonds to stocks will get you back on target; letting you buy at prices we haven’t seen in years. Throw in tax-loss harvesting, and you have helped yourself take profits in the future, offset future capital gains, and dump those underperforming low-basis stocks.

#2 Consider discontinuing your required minimum distribution (RMD) or giving it back. The CARES Act allows individuals to skip this year’s required minimum distribution and keep it invested, taking advantage of any market recovery. If you have already taken your RMD for 2020, you have the opportunity to return those funds back to your retirement account within 60 days. Just know that it counts toward your one rollover per year IRS policy. Any tax withholding election taken would also need to be deposited back to your retirement account to complete the rollover. If you find yourself outside the 60-day window, you still may have an opportunity to get that money back into your retirement account. If your distribution qualifies as a Coronavirus related distribution, you have up to three years to roll the received money back into your retirement account. One final note, if you turned 70 ½ in 2019 and were waiting (or just forgot) to take that 2019 RMD, guess what, you got away with no RMD and no penalty for missing it. The CARES Act also removed the April 1, 2020 deadline for first year RMD removals for 2019 (Woohoo! No 50% penalty on the distribution amount). However, your RMD distributions will start again in 2021.

#3 Consider converting pre-tax retirement money into after-tax retirement funds. A Roth conversion gives you the ability to take pre-tax retirement assets and move them into an after-tax (ROTH IRA or 401(k)) retirement account. You will pay taxes on the amount you convert this year, but the future withdrawals from the Roth account will be income tax-free as long as you meet the qualified distribution requirements. If you considered a Roth conversion before the market downturn, you are possibly in a better position now. For example, if you converted $100,000 of Traditional IRA equity assets on January 2, 2020, those assets are potentially worth less now, but the IRS is still going to use the $100K figure in calculating the taxes you owe for converting. If you procrastinated, and you didn’t do the conversion yet, here are two options to consider:

  1. You could still convert the same number of shares you intended, now worth less than $100K, paying fewer taxes on that smaller conversion amount; or
  2. You could stay with your original conversion amount of $100K in securities and convert over more shares of stock. Now your Roth account has more shares that will appreciate in an after-tax account.

Each client’s situation is different. Your advisor should walk you through a conversion exercise before making a final decision. Also, check with your tax preparer about the impacts to your taxes. The deadline for a 2020 Roth conversion is December 31, 2020.

COVID-19 has changed a great deal in our lives in a short period of time; but that doesn’t mean we should stop thinking about ‘Investing in a Good Life’ and taking control of planning opportunities. If you are interested in learning more about the CARES Act, check out these blogs:

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