As we enter the next few weeks of the ongoing COVID-19 pandemic the headlines are sure to disorient and worry us all. Federal, state and local responses will unfurl in real time with varying degrees of effectiveness, further confusing matters. It’s a difficult time to plan logically and efficiently on many fronts.
In terms of your investments, the government has acted swiftly to enact powerful legislation, with possibly more to come, that might affect your decisions in the coming weeks and months.
Here is a simplified breakdown of the recent legislative wave. Read and absorb it but do not feel that you must take action today. Instead, it might be a good time to schedule a conversation with your investment advisor in order to tailor a response that will be most effective for you.
The first direct government response to the COVID-19 pandemic, the Coronavirus Aid, Relief, and Economic Security (CARES) Act, became law on March 27. While much of the law focuses on business relief, there is direct and indirect aid for individuals.
Tax rebate payments for most Americans. The law directs the Treasury to rebate taxes previously paid of at least $600 (for those who paid no taxes in recent years) and up to $1,200 per taxpayer, plus $500 per child, to offset income lost due to the pandemic. People do not have to do anything to receive money and the payments should arrive directly in your bank account starting this week, if the IRS has your account information (for most taxpayers, they do). The per-taxpayer amount is double for jointly-filed returns. Those with IRS-reported incomes above $75,000 ($150,000 for couples) will see their payment phase out gradually, falling to zero for single filers earning above $99,000 a year.
Tax deadlines shifting. The IRS has moved the deadline for filing and for paying federal taxes by 90 days, to July 15, 2020. You do not need to file for an extension or take any action. It’s better to file your taxes on time if you can, of course, and to be careful that you continue to prepare for the following year’s taxes as normal. Some state tax deadlines also have shifted to July 15, but you should confirm that with your state tax collector.
IRA contribution deadline also moving. As the tax deadline has changed so has the deadline to contribute to an IRA for 2019. You now have until July 15 to do so. In addition, you can make Health Savings Account (HSA) and Archer MSA contributions for 2019 up to July 15.
No 2020 RMDs. If you currently take RMDs or expect to begin taking them this year, you can wait. Rather than having to sell at a market low investors can leave money in traditional IRAs and 401(k)-type plans. It’s not yet clear if people who took RMDs early in the year can roll that money back outside the normal 60-day window. The IRS is expected to address the issue soon.
Hardship withdrawals increased. Anyone can take up to $100,000 from their retirement accounts penalty-free. Taxes will be due but can be paid over three years and any money withdrawn can be repaid over three years as well. Repayments are not counted against any new contributions in that year, and if money is repaid the saver is eligible for a refund on the taxes.
Loan maximums higher, easier terms. You also can choose to take a loan against your retirement account of up to $100,000, double the normal limit, and the loan amount can be more than half of your account balance (a 50% limit is waived). The money must be borrowed within 180 days of March 27, and no repayment is required in the first year.
Billed as a major reform of America’s mostly private retirement system, the Setting Every Community Up for Retirement Enhancement (SECURE) Act touches many parts of society, including small businesses, new parents and retirement savers. It became law on Dec. 20, 2019.
The starting age for required minimum distributions (RMDs) rose to 72 from 70 1/2. If you turned 70 1/2 in 2019 this change does not affect you. However, anyone younger can put off RMDs for longer, which allows investments to grow while reducing taxes.
The age limit for IRA contributions has been removed. If you plan to work past 70 1/2 you can now defer income into an IRA with no upper age limit. Before, contributing past that age was not allowed.
Inherited IRA distributions must now be taken within 10 years. The so-called “stretch” IRA previously allowed inheritors to take their RMDs over potentially many years. Now they must take all of the money out as distributions within a decade, which could increase tax bills. Spouses, minor children, disabled and chronically ill individuals, and anyone less than 10 years younger than the decedent are exempted. Minors begin the 10-year countdown at age 18. Existing inherited accounts escape this rule change.
Annuities may be sold in 401(k) plans. High-cost products such as annuities rarely serve retirement investors well. Consider talking to an investment advisor before leaping into any long-term financial services contract.
It borders on the impossible to predict how the COVID-19 crisis will play out. The best we can do for now is to keep our families safe and educate ourselves on proper pandemic hygiene.
If you are unsure about your investments, bear in mind the Hippocratic oath taken by doctors: “First, do no harm.” The easiest way to avoid harming your financial investments is to avoid rash choices in a volatile investment market. The easiest way to avoid rash choices is to have a portfolio that has been constructed in advance for the unexpected.
Please rest assured that your Rebalance portfolio was built to withstand exactly this kind of investment turbulence. We may continue to feel the economic aftermath of the virus for many months, and there may be further legislation in response to that impact. Your Rebalance team is here to guide you through the turmoil ahead.
In the short run, it is likely that no action is the best course for most people’s situations. If any of the changes discussed above affect your medium-term investment planning, your Rebalance investment advisor can help you make timely and intelligent moves in response to changing laws.
Above all, remember that you are not alone in this. Focus on your family and your health. Rebalance stands ready to aid our clients with the investment side of life as needed.