There was a lot of fuss around the most recent COVID-19 stimulus bill, which President Trump signed into law shortly after Christmas. While most of what is in the bill is clear at this point–it has been about three weeks since it was signed–one area that seemed to produce at least a little confusion was whether the bill extends tax breaks from Coronavirus-related distributions (CRDs) from retirement accounts. I have written about CRDs in past blogposts over the past year. As you may recall, CRDs allowed you to take a aggregate distribution of up to $100,000 from your retirement accounts in you were directly impacted by COVID-19 (i.e. you were diagnosed and had to quarantine or you were laid off due to Coronavirus restrictions) and that the distribution was not subject to the 10% early withdrawal penalty and you have three years to pay back the distribution. CRDs were designed to help those in financial distress as a result of the Coronavirus pandemic and was most likely a lifeline for many struggling Americans in 2020. Back to the latest Stimulus package. It was reported by at least one news source that the new stimulus package extended CRDs into 2021. I want to be clear here that such information is incorrect and that the new legislation did not carry CRDs into 2021. This is important because if you planned on taking a CRD in 2021, you can’t and also as a reminder to do some research and read up on any Coronavirus-related relief legislation to see how it might impact you. Now, I don’t know what the future holds and depending on how this pandemic continues to play out, the next administration might put CRDs back on the table, but I have heard no definite inklings about that, I’m just saying anything is a possibility at this point. If you took a CRD in 2020 and want to figure out how to pay it back or find yourself in further Coronavirus-related financial hardships in 2021, you will want to speak with a certified financial planner or wealth manager to figure out what the best moves might be best for you.
We are less than two weeks away from the end of 2020 (which we can all agree, probably can’t come soon enough!). As the year wraps up, now is a good time to review your budgeting and expenses over the past 12 months and see where, and how, you spent your funds. If you had a budget you were working in, did you meet your benchmarks? Did you spend more than intended in certain areas or less? Where there legitimate reasons for overspending? If you don’t have a budget, did you find yourself spending more than you thought on particular items/services? Do you want to get your expenses in order or under control? Use the answers to these questions to help guide you as you prepare your finances for 2021. If you find your expenses or spending habits make you a bit uncomfortable, you may want to consider getting more serious about budgeting. If you need help with getting your finances in order, I encourage you to meet with a certified financial planner or wealth manager who can help you both organize your money as well as place it in a spot where it can grow or help your future.
If you’ve been staying on top of stimulus bill talk over the past 10 months or so, then maybe you’ve heard the phrase Coronavirus Related Distribution (CRD) and are aware that they are penalty free distributions from your retirement accounts. I think I’ve mentioned them a few times in past blogposts as well. If you have been considering taking advantage of a CRD due to hard times, then you should do so as soon as possible. The deadline to take a CRD is December 30, 2020, which is a little less than two weeks away at this time. Now, I am not encouraging you to take a CRD as I am against taking money out of a retirement account early unless it is the absolute last resort. However, if you find yourself in certain situations that meet CRD requirements–such as being diagnosed with Coronavirus or having lost a job because of it–then you may want to consider a CRD to tide you over for just a short time. And remember, there’s only a couple weeks to do so, so you need to make that decision soon! If you do consider taking a CRD, I encourage you to read up about them or speak with a certified financial planner or wealth manager about it to make sure it’s really the best decision for you.
Many Americans choose to make charitable donations with their retirement funds. For some it’s a way to give back to the community, while others use it as a way to support causes that are important to them. Whatever the reason for donating–if you choose to do so–you should understand the ramifications of that decision as well as the most efficient way to make a donation. It’s been a while since I’ve written about it, but qualified charitable distributions (QCDs) are probably the most efficient and effective way to make a charitable donation from your retirement funds. In case you forgot what a QCD is, it’s a charitable donation of up to $100,000 to a qualified 501(c)(3) charity made from an IRA. A QCD can offset any RMDs that need to be made for that year, but can only be made if you are 70 1/2 years old. QCDs offer a similar tax outcome to itemizing your charitable giving, if that matters to you. And yes, QCDs are allowed this year even though RMDs are suspended. Which leads me to my next part of charitable giving–the tax implications. While I cannot offer tax advice, I can advise you to speak with a tax professional if you are making substantial charitable donations in the hopes of taking advantage of tax incentives for doing so. That goes for whether you are over 70 1/2 and are making a QCD or are not yet retired, but want to make a substantial donation to your favorite charity. A tax professional should be able to give you a good idea as to how a donation may impact your taxes and whether it’s overall a good idea. However, if you want to know how a QCD or other charitable giving might affect your nest egg or financial plans, you will want to also speak with a certified financial planner or wealth manager.
You can’t plan for retirement without first thinking about the money you will be spending in retirement. Thus, your retirement planning–and everything that follows those initial plans–will focus on your nest egg. How you build that nest egg will have a monumental impact on what you can do when you actually most into your post-career life. If you take aggressive steps and keep on top of your nest egg, then you will probably have a good chunk of money ready for when you stop working. On the flip side, if you don’t take steps to properly build up a nest egg or make bad decisions when doing so, then you probably won’t have much flexibility in retirement or may have to work longer than intended to meet your goals. No matter how you slice it, your nest egg is essential to your retirement plans. Now, if your nest egg isn’t quite where you want to it be right now, don’t fret. You can always take steps to get back on track and then determine what’s realistic from there. There is no on-size-fits-all answer for that, but some steps would include re-evaluating your retirement goals, analyzing your portfolio and/or investment decisions, or working with a financial planner or wealth manager to really kick your saving into gear. Each person’s situation is unique regarding how much they need to save for retirement, so some may have a lot of work to do while others may be right on track. What’s key, no matter where you are in your saving journey, is that you never lose track of your nest egg and that you focus on building it up as much as possible. So, how big is your nest egg?
It can be tempting to look at your nest egg and see an untapped source of money, particularly if your nest egg is sizeable and you are nearing retirement. For example, maybe you found your dream retirement home and need money for a down payment. You may look to your IRA for a short-term loan to meet those money requirements. I’m here to tell you that that is a bad idea and to discourage you not to do so. The biggest reason being that you don’t want to tap into your IRA monies until you actually retire and, even then, you will want to have a plan for doing so. You’ve worked hard to save up for your post-work life and you want to make sure that money goes towards your retirement goals (of course, if purchasing a retirement home is part of your plan, then that’s a different discussion). The other risk of viewing your IRA as a loan source is the risk of making a mistake when taking out money. Keep in mind that there are two routes you can go when taking money out of your IRA before reaching retirement age. First off, you can take a distribution, pay the taxes and penalties, and then not have to worry about what you do with the money. The other option is to take out the money and do a 60 day rollover, which will involve paying back the money within that 60 day window. There’s a lot of risk involved with that. I repeat, there is a lot of risk involved with doing this. Mainly, if you take out the money, is there any guarantee that you will recoup it within that 60 day window? Chances are, you are going to be making a large purchase if you need a loan (probably talking thousands of dollars), so what are the chances that you will make that money back in two months? If you are certain that you can do that, then maybe you can consider it. However, if you aren’t so sure that you can complete such a transaction in that timeframe, stay away from this idea. That can lead to a lot of problems if you aren’t able to put the money back within those 60-days. Hint: Don’t open yourself up to the IRS taking more of your money through penalties! If you are in need of money, you should consider other types of loans or selling off other assets before even considering your IRA as a loan source. You may even want to really think about whether you even need to make the purchase at that time and whether you can put it off until you actually have the funds and leave your retirement money alone.
If you’re serious about saving for retirement, then you’ve probably done a lot of research and reading about the strategies you can use to do it, the tools the use, and things to look out for. Over time, that knowledge can really build up and it can be tough not to want to share it with family and friends. Guess what? There’s nothing wrong with that. After all, knowledge is power. That means the more you–and in this case, others–know the better you can be when it comes to making financial and retirement decisions. Now, before I go any further, I want to caution to you to be careful when it comes to giving advice regarding taxes or particular investments. Furthermore, if you find that you’re gathering a large following or are taking payment in return for financial advice, you should be very careful and maybe should consider becoming a financial advisor or wealth manager so as to protect yourself and get the credentials needed. In regards to taxes or tax-based strategies, you can potentially open yourself up to some legal liability, particularly if you are not properly credentialed to do so and if things go south (in other words…don’t mess with people’s taxes or tell them what to do with their taxes if you’re not a CPA). Anyways, in regards to sharing your knowledge, maybe you’ve learned some really great tips from an financial advisor or maybe you really like crunching numbers and want to help others who aren’t so skilled. Don’t be afraid to share your knowledge and skills to help others obtain a better grasp of their finances and retirement savings. Even if it’s just a matter of helping a friend set up a spreadsheet to track their expenses or helping a family member research an investment opportunity, you can share what you know and help others. Of course, if you aren’t comfortable with helping others with financial planning or preparing for retirement, you could also always just pass on the name of a reputable wealth manager or financial advisor.
I was recently reading an article that discussed the impact one’s health can have upon their retirement and retirement savings. This article wasn’t about the cost of healthcare in retirement and aging, but rather how living a healthy lifestyle can be really helpful when it comes to retirement and how it’s not impossible to do. When many people connect health and wealth in retirement, the conversation just about always centers around the cost of aging–things like medications, assisted living, visits with specialist doctors. Very few people talk about living a healthy lifestyle–both before retirement and once you reach retirement–and how that can make your nest egg go farther and your overall wealth increase. Yes, healthier people tend to be more successful professionally and tend to make more money. When you make more money you can build up a bigger nest egg! Doesn’t that sound nice? Realizing the way your health may impact your retirement savings can be huge from a planning standpoint as well. If you know that you may be susceptible to certain conditions or diseases (i.e. through genetics or lifestyle), then wouldn’t you want to plan for that? Of course you would. Now, if you aren’t living the healthiest lifestyle at the moment, don’t fear, it’s never too late to start. What matters is that you take the steps necessary to get healthy. How do you think your health might impact your wealth?
Life can be unpredictable. What might seems like a good idea today can become a bad idea tomorrow. Thus, it can be hard to truly plan for the future when you don’t know what it holds. It’s also what makes life so unpredictable. Luckily (or should that be surprisingly), the IRS realizes this and has allowed some flexibility with what you can do with your IRA(s). For example, they know that there may be times when you need more money than your annual required minimum distribution (RMD). Therefore, they allow for you to take about more than your RMD amount. Another example is that they allow you to take a withdrawal–obviously, so long as you meet requirements–even if you already took your RMD. Even if you rolled that RMD back into your IRA, you can still take a distribution. Keep in mind with rollovers, there is still a once-per-year rule, but that is suspended for 2020 RMDs until August 31, 2020 (you have until that date to roll your 2020 RMD back into your IRA). While the IRS often gets painted as cruel, they do realize–occasionally–that life can be have some unexpected turns and that you should be able to have to flexibility financially to meet those twists and turns. If you want to roll your 2020 RMD back into your IRA or just want to figure out whether you can take our more than your RMD, I strongly encourage you to talk with a certified financial planner or wealth managers. They can help to make sure you take the right steps.
One of the worst things you can do when the market takes a dip (or a dive) is to immediately pull your money out. While it may seem logical–why lose any more money–it’s almost always the wrong move. Taking money out during a downturn makes it incredibly difficult to take advantage of the eventual upturn. If you understand the tax implications of losses, you further take advantage through smart tax harvesting (I’m not going to get into that here). Now, I’m not talking about divesting your money in one stock and investing it in another that you think is poised to rebound. I’m talking more about divesting to preserve your cash and then investing when you think things look better. Trust me, by the time things “look better,” you’ll probably miss out on a good chance to make money (the best place to invest in a stock is at the bottom…nowhere to go but up!). The best thing to do when markets take a dip is not to react immediately. Give it a little time and see what happens. If things don’t appear to get better over time (days, weeks), then you may want to consider diversifying your investments or making changes to your portfolio. If there are parts of your portfolio where things are struggling and another where things are strong, you may want to consider focusing on the stronger areas. If you need help with your investments or portfolio, as always, I suggest you take with a certified financial planner or wealth manager or another investment professional.