Financial Planning Tips to Consider Now

financially savvy kids

By K. Bridget Schneider, CFP®, CRPC®

financial planning tips

The S&P 500 reached its peak in mid-February of this year, and investors were feeling good about their account values.  However, in the following weeks that good feeling began to disappear.  Concerns of a pandemic unlike anything we have seen for generations caused our federal and state governments to put our economy into an “induced coma” of sorts as we were asked to stay home and stop the spread of the virus.  We experienced large swings in market valuations and, as a result, in investment account values. 

As investors review their statements for the first quarter, some are feeling uncertain and scared about the financial impact.  Even with the recent increase in valuations, financial advisors are encouraging them to remain calm, stay the course, and avoid panic-selling.  The recent market volatility offers some financial and tax planning opportunities. Here are a few financial planning tips you can implement now. 

Review Your Retirement Plan

Rather than worrying about a loss of value in investment accounts, consider doing an analysis to see whether your retirement plan outcome has changed and if so, by how much.  Ask your financial advisor to re-run your retirement cash flow projections.  We typically use conservative rates of return to account for the up and down market returns you may experience over time.  In other words, the portfolio taking a hit can, and should, be part of the plan.  You may find that the lower valuation doesn’t affect as much as you imagined.  If it has caused a significant change, then you can discuss ways to adjust to get back on track.  You may even find these adjustments far easier than what you fear.

If you don’t have a retirement plan, now may be a good time to put one together.  Saving for retirement without knowing how much you may need to fund it is like going on vacation without planning the trip – you might see some nice things, but you may miss the great things your vacation spot is known for.  You can visit Get A Financial Plan or check out this calculator to see if you are on track.

Roth Conversions

The decision of whether to do a Roth conversion of your pre-tax retirement savings is mainly a tax decision.  Do you think paying income tax today at current rates is better than paying at future tax rates?  If you decide the current tax rates are more favorable for you than they may be in the future, then you might want to take advantage of this market dip to do a Roth conversion now.  The lower value of your pre-tax retirement account means less income tax will be paid on the amount converted to a Roth account. 

Another reason to consider doing a conversion is to have access to tax-free withdrawals in the future.  Since you will already have paid income tax on the converted amount, it can be withdrawn after 5 years with no income tax or penalty due.  And any recovery of value after conversion will be tax free upon withdrawal provided the rules are met.  In contrast, withdrawals of those gains from your pre-tax retirement account will be taxable at future ordinary income tax rates. 

Reduce or Temporarily Eliminate the Unnecessary

Whether or not your cashflow has been impacted by the COVID-19 crisis, you may feel the need for more caution in the current economic environment.  Due to recent legislative relief, there may be some types of payments that can be reduced or postponed – for example, Federal Student Loan Payments or credit card payments.  You should reach out to your loan servicers or to individual credit card companies to inquire about options.

In addition, the CARES Act has suspended Required Minimum Distributions from retirement accounts for this year.  You can still withdraw the money if you need it.  But if you don’t withdraw it, you won’t have to pay income tax on it and any earnings can continue to accrue tax deferred. 

For those of you who have already taken your Required Minimum Distribution for this year, you may be eligible to return it to the IRA and avoid paying income tax on it for 2020.  In Notice 2020-23, the IRS provided an indirect way for clients who took a now unwanted RMD on February 1 or later to roll the funds back to an IRA or retirement plan.  This IRS notice allows for an extension to July 15, 2020, of the 60-day rule, but only for those who took that now unwanted RMD between February 1, 2020, and May 15, 2020, provided the once-per-year rule is not violated.

Emergency Fund Contingency Plan

One of the first rules in financial planning is to create an emergency fund for a rainy day.  Typically, this consists of three to six months of expenses.  Even with the unprecedented relief from our federal government, it may be psychologically beneficial for you to consider your next source of cash should you deplete your emergency fund.  That way you can be better prepared, especially if your next option takes some time to establish.

Summary

While none of us wish for times like these, it is these moments that provide opportunities that may not otherwise be available.  As the saying goes “when life gives you lemons, make lemonade!”  Some of you may find value in talking with a Financial Advisor or Certified Financial Planner™ professional.  If you would like help with investing or have financial planning questions that need answers, then be sure to visit our website today or call us at 217-605-8130.  Our goal is to help you make more informed financial decisions.  As your friendly financial guide and ally, we can help you create a budget, develop a financial plan, review your investment strategy, or structure an estate plan that makes sense for your unique situation. 

 

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual, nor intended to be a substitute for specific individualized tax or legal advice.  The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

Traditional IRA account owners should consider the tax ramifications, age and income restrictions in regards to executing a conversion from a Traditional IRA to a Roth IRA. The converted amount is generally subject to income taxation.

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