Not All ESG Funds Are Created Equal

Contributed by: Kali Hassinger, CFP®, CDFA®

 

If you’ve read last week’s ESG blog, you should be familiar with the basic ideas driving ESG investing and aware of the recent investor rush to ESG investment funds.  Although 2020 was full of unforeseen circumstances, the trend to Sustainable and Responsible Investing has been building over many years. 

In the past, ESG was often used interchangeably with SRI, or Sustainable and Responsible Investing.  In reality, they are not exactly one in the same.  ESG analysis creates a set of standards used to screen investments through Environmental, Social, and Governance criteria.  Almost all Sustainable and Responsible strategies use at least one of the E, S, or G factors within their analysis, which is perhaps why the ESG abbreviation seems to have taken hold in recent years.  However, there are four prominent Sustainable and Responsible Investment approaches that are most often used to develop a portfolio or mutual fund.

Best-In-Class (Positive) Screening

This strategy involves investing in companies or sectors that have the best, or most positive, ESG performance relative to their peers.  The hope is that the investments selected in a best-in-class process will be able to handle unexpected changes regardless of the industry.  However, one criticism is that this includes all industries and sectors, often incorporating gas, oil, and mining companies, as long as they are handling ESG factors better than their peers.  Some refer to this as the “least bad” approach, as opposed to the best.  This is a good option for those who are afraid to miss out on returns by removing investments due to ESG factors.

Exclusionary Integration

Negative screening is what many so often associate with ESG investing.  This is most likely because it one of the oldest screening approaches and was often guided by religious beliefs with the investments eliminated through this process often referred to as “sin” stocks.  This approach, however, has evolved over the years to be less explicitly aligned with religions.  Now, exclusionary screens work to avoid companies based on more ESG related factors, such as fossil fuels, animal cruelty, and weapons production.  This approach is appropriate for investors who have specific ethical or religious motivations and want to be sure that their money is invested in a way that aligns with their beliefs.

ESG Integration

The ESG Integration approach involves using environmental, social, and governance factors to make decisions within a traditional financial analysis process. This approach does not prohibit investments in any particular sector or industry, and it searches to find value and opportunities by combining ESG information with conventional financial information. This method can include companies who have historically performed poorly in relation to ESG factors but who are working to improve on an environmental, social, or governance issue.  Notice the usage of OR in the last sentence.  This means that companies do not need to score or screen well in all three factors to be included or considered within an ESG integration fund.  This flexibility provides a vast investment universe and can be more palatable for investors who are still skeptical of ESG investing.

Sustainability-Themed Investing

Sustainability-themed investing often develops a portfolio aimed at solving a specific environmental or sustainable issue.  Within the selected theme, such as clean technology, climate change, animal welfare, or green energy, analysts will work to determine the strongest companies who positively represent this issue.  This allows investors to focus their resources on specific trends and to invest in companies who reflect those same beliefs in their business practices.

Although we have discussed these approaches as four separate methodologies, in reality, most ESG mutual funds use a combination of several or all of these tactics to build their portfolio.  This combination, which less frequently excludes specific industries or companies than it has the past, allows for more flexibility, which can translate to more opportunity for investors.  Many believe that companies who are focusing energy and time on ESG factors will be more poised for future success.  Are you interested to know how The Center develops and manages our ESG strategies?  Jaclyn Jackson, CAP® our firm Portfolio Manager will provide some insight next week!

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Kali Hassinger, CFP®, CDFA® is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® She has more than a decade of financial planning and insurance industry experience.

Investing involves risk and you may incur a profit or loss regardless of the strategy selected. Sustainable/Socially Responsible Investing (SRI) considers qualitative environmental, social and corporate governance, also known as ESG criteria, which may be subjective in nature. There are additional risks associated with Sustainable/Socially Responsible Investing (SRI), including limited diversification and the potential for increased volatility. There is no guarantee that SRI products or strategies will produce returns similar to traditional investments. Because SRI criteria exclude certain securities/products for non-financial reasons, utilizing an SRI investment strategy may result in investment returns that may be lower or higher than if decisions were based solely on investment considerations. Investors should consult their investment professional prior to making an investment decision.

A Better Way To Pass Down Wealth To The Next Generation

Contributed by: Kali Hassinger, CFP®, CDFA®

You may have heard the saying, “Shirtsleeves to shirtsleeves in three generations.”  In a family, it refers to the phenomenon of a generation building wealth, passing it down to the second generation, but going broke by the third. Whether you are passing down investment assets or a family business, many parents have the hope that their money will enrich the lives of their children, grandchildren, and future generations for years to come. However, successful transitions do not just happen when assets are distributed.  Like most challenges in life, transitions require planning, communication, and coordination.

When planning for generational wealth transfers, opening the lines of communication is often the first and most difficult hurdle to overcome. Parents may be reluctant to share information on wealth and money for many different reasons. Our society as a whole often treats money as a taboo subject that is rarely discussed in personal terms. Other concerns could be stifling an heir’s initiative or the threat of a child’s future divorce. Simply avoiding these conversations, however, can lead to unintended confusion, irresponsibility, or resentment.

Family meetings devoted to discussing wealth can help heirs better understand their parents’ plan and any possible role they may play in the future. Family meetings also give participants the opportunity to express their views, accept responsibility, or acknowledge where they may need additional help in the future. There are many ways these meetings can be conducted, but they all center on the same objectives of trust, communication, and understanding.

A meeting with the family’s advisors, financial planner, attorney, and CPA should take place at some point as well. This will help the family to gain both comfort with the advisors and a greater understanding of the level of assets in question. With the passing of the SECURE Act eliminating the stretch IRA in many situations, retirement assets that are transitioning to the next generation may require more detailed tax strategies. The Estate tax limit has also fluctuated drastically throughout the last few decades, and that will most likely be the case going forward.  It’s important that those who will ultimately gain control of assets understand why plans were put into place and how they will function going forward. While no amount of planning can ultimately guarantee success, when the lines of communication are open between owners, heirs, and advisors, a family is able to develop the best strategy for all involved.

Successful family meetings are intended to engage family members, not be a set of rules handed from one generation to the next. Healthy communication builds trust, and trust builds understanding. We often encourage clients to involve children in their Annual Review meetings when they're comfortable. If full disclosure of all information seems too invasive initially, have a conversation with your planner prior to the meeting. We are happy to tailor the meeting as necessary and can review only the portions of your plan that you are comfortable sharing!

Helping You Set Your Financial Goals For The New Year!

Contributed by: Kali Hassinger, CFP®, CDFA®

New beginnings provide the opportunity to reflect.  What choices or experiences got you to where you are today, and where do you want to go from here?  Whether you’re motivated by the New Year or adjusting your course due to circumstances outside of your control, goals provide the opportunity to set your intentions and determine an action plan.

Budgeting, saving, retirement, paying off debt, and investing are all common, and often reoccurring, resolutions and goals. Why reoccurring?  Because, as is human nature, it is too easy to set a goal but lose focus along the way.  That is why it’s so important to set sustainable goals and find a way to remain accountable.

Working with an outside party, like a financial planner, can help you define these attainable goals and, most importantly, keep you accountable.  When we make commitments to ourselves and share them with others, we are more likely to follow through.

When goals are written down and incorporated in a holistic financial plan, it becomes easier to track progress and remain committed throughout the year.  The financial planning process, when executed correctly, integrates and coordinates your resources (assets and income) with your goals and objectives. As you go through this process, you will feel more organized, focused, and motivated. Your financial plan should incorporate the following (when applicable):

• Goal identification and clarification (you’re here now!)

• Developing your Net Worth Statement

• Preparing cash flow estimates

• Comprehensive investment management and ongoing monitoring of investments

• Financial independence and retirement income analysis

• Analysis of income tax returns and strategies designed to help decrease tax liability

• Review of risk management areas such as life insurance, disability, long term care, and property & casualty insurance

• College funding goals for children or grandchildren

• Estate and charitable giving strategies

As you reach one goal, new ones can emerge, and working with a financial planner can help you navigate life’s many financial stages. When you’re setting and working toward your objectives, don’t hesitate to reach out and share them with your trusted financial planner!  If you aren’t working with anyone yet, it’s never too late to start!  

Kali Hassinger, CFP®, CDFA®, is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® She has more than a decade of financial planning and insurance industry experience.

Consolidated Appropriations Act Of 2021: More Stimulus On The Way

Contributed by: Kali Hassinger, CFP®, CDFA®

After months of deliberation, Congress passed a bill providing a second round of Coronavirus relief, and it was signed by the president on December 27th.  This will provide direct payments to citizens, extend unemployment benefits, and reopen the Paycheck Protection Program to provide loans to small businesses.  This Act, totaling $2.3 trillion dollars, earmarks $900 Billion for stimulus relief with the remaining $1.4 trillion for the 2021 federal fiscal year.   

The direct stimulus rules are largely similar to the CARES Act from March 2020, with a few changes, most notably, of course, the amounts provided.

Direct Payments

Based on income and family makeup, some Americans can expect to receive a refundable tax credit as a direct payment from the government.

• Who is eligible? Eligibility is based on Adjusted Gross Income with benefits phasing out at the following levels:

  • Married Filing Jointly: $150,000

  • Head of Household: $112,500

  • All other Filers (Single): $75,000

If income is above the AGI limits shown above, the credit received will reduced by $5 for each $100 of additional income.

• How much can I expect to receive?

  • Married Filing Jointly: $1,200

  • All other Filers: $600

  • Additional credit of up to $600 for each child under the age of 17

The rebates are dispersed based on your 2019 tax return, but, like the CARES Act, is a 2020 tax credit.  This means that if your income in 2019 phased you out of eligibility, but your 2020 income is lower and puts you below the phase out, you won’t receive the rebate payment until filing your 2020 taxes.  The good news is that those who do receive a rebate payment based 2019 income, and, when filing 2020 taxes, find that their income actually exceeds the AGI thresholds, taxpayers won’t be required to repay the benefit.

• When will I receive my benefit? As soon as possible, though delays similar to the CARES Act payments should be expected. 

• Where will my money be sent?  Payment to be sent to the same account where recipients have Social Security benefits deposited or where their most recent tax refund was deposited. Others will have a payment sent to the last known address on file.

Charitable Giving Tax Benefits

• The charitable deduction limit on cash gifted to charities will remain at 100% of Adjusted Gross Income for 2021.  This was increased from 60% to 100% for 2020 with the CARES Act.  If someone gifts greater than 100% of their AGI, they can carry forward the charitable deduction for up to 5 years.  This does not apply to Donor Advised Fund contributions.

• This Act also extends the above-the-line tax deduction for charitable donations up to $300 that was authorized by the CARES Act, but it increases this deduction to $600 for married couples ($300 per person)

Support For Small Businesses

The Paycheck Protection Program (PPP) will allow businesses affected to COVID-19 to apply for loans. Those who did not receive a loan through the CARES Act once again have the chance, and those who successfully applied for a loan previously, may have the opportunity to obtain another loan. If applying for a second loan, however, the previous loan funds must already have been received and spent.

Some of the Paycheck Protection Program provisions are more stringent and other provide more clarity:

• The business must have experienced a 25% or larger drop in revenue for any quarter in 2020

• The loan is limited to a 2.5 times the average monthly payroll costs or 3.5 times for businesses categorized as “Accommodation and Food Services.”  The total amount received is capped at $2 million.

• Expenses paid of forgiven Paycheck Protection Program funds are deductible

  • The IRS tried to withdrawal the deductibility of items funded with PPP, but this Act states that expenses paid with both forgiven and new PPP loans shall remain deductible.

• Loans are limited to businesses that have no more than 300 employees with the exception, again, for businesses categorized as “Accommodation and Food Services.”

Expanded Unemployment Benefits

Unemployment benefits were set to expire for many Americans, but the Consolidated Appropriations Act extends the benefit for an additional eleven weeks.  Additional relief will also be provided at $300 per week until Mid-march when the extension expires.

Individual Healthcare & Tax Planning

• Individuals are able to deduct medical expenses if they exceed 7.5% of their Adjusted Gross Income.  This hurdle was previously 10% of AGI.

• FSA funds that haven’t been used in 2020 can be rolled into 2021 if the employer permits this extension. 

Higher Education Deduction With Increased Phase-out

The Lifetime Learning credit provides a credit of 20% of the first $10,000 spent on higher education expenses (so $2,000 if you spend $10,000). The income phase-out limit has been increased to match the American Opportunity tax credit at $80,000 to $90,000 for single filers and $160,000 to $180,000 for joint filers. Although the American Opportunity tax credit is more lucrative for the amount spent (100% credit up to $2,000 in education expenses with an additional 25% credit on the next $2,000 of expenses.  So a total credit of $2,500 on $4,000 spent), you can only claim this credit for 4 years.  As the name Lifetime Learning credit implies, you can claim this credit throughout your lifetime!

Earned Income Tax Credit Changes

The Earned income Tax Credit and additional Child tax credit are determined by an individual’s earned employment income.  Because so many Americans have faced periods of unemployment in 2020, this Act will allow individuals to use their 2019 earned income to calculate the amount they will receive for 2020.

Student Loan Repayments

The ability for an employer to pay up to $5,250 of an employee’s qualified student loan debt is extended through 2025. The employee receives this benefit tax free.  

The period of time between the passing of the CARES Act and the passing of a 2nd round of relief throughout the Consolidated Appropriations Act of 2021 was much longer than many anticipated.  Thankfully the majority of the legislation did not provide short term deadlines for the end of 2020!

Kali Hassinger, CFP®, CDFA®, is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® She has more than a decade of financial planning and insurance industry experience.

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The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. You should discuss any tax or legal matters with the appropriate professional.

Will Social Security Recipients Get A Raise In 2021?

Contributed by: Kali Hassinger, CFP®, CDFA®

Social Security benefits for nearly 64 million Americans will increase by 1.3% beginning in January 2021. The adjustment is calculated based on data from the Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI‐W, through the third quarter. This cost of living adjustment (COLA for short) is among one of the smallest received, other than when the adjustment was zero.

The Social Security taxable wage base will increase to $142,800 for 2021, which is a 3.7% increase from $137,700 in 2020. This means that employees will pay 6.2% of Social Security tax on the first $142,800 earned, which translates to $8,854 of tax. Employers match the employee amount with an equal contribution. The Medicare tax remains at 1.45% on all income, with an additional surtax for individuals earning over $200,00 and married couples filing jointly who earn over $250,000.

Medicare premium increases have not yet been announced, but trustees are estimating Part B premiums will increase by about $9 or less per month for those not subject to the income‐related surcharge. Unfortunately, the Social Security COLA adjustment is often partially or completely wiped out by the increase in Medicare premiums.

For many, Social Security is one of the only forms of guaranteed fixed income that will rise over the course of retirement. The Senior Citizens League estimates, however, that Social Security benefits have lost approximately 33% of their buying power since the year 2000. This is why, when working to run retirement spending and safety projections, we factor an erosion of Social Security’s purchasing power into our clients’ financial plans.

Kali Hassinger, CFP®, CDFA®, is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® She has more than a decade of financial planning and insurance industry experience.

Is Now The Time To Refinance Your Mortgage?

Contributed by: Kali Hassinger, CFP®, CDFA®

Long-term interest rates and thus mortgage rates have hit historical lows this month. This has been a continuing trend with mortgage interest rates hitting historical lows eight times in the last five months. This is partially due to the Fed’s aggressive purchasing of mortgage-backed securities since March.  

If you’re like many, you may be wondering if this is the right time to refinance. Although there are many benefits to refinancing, it’s important to be sure it’s appropriate given your current situation.

Here are some items to consider if you’re thinking of taking advantage of these once again, historically low mortgage rates:

• How long do you plan on staying in your home? There is a cost to refinancing. To justify the fees, you should be planning to stay in your home for at least another two to three years.

• What is more important to you: lowering your monthly payment or lowering the amount you pay over the life of the loan? Reducing the term of the loan, even if it means the payment will slightly increase, can significantly reduce the total interest paid!

• If you have an outstanding second mortgage or home equity line of credit, consider combining them into one loan with a fixed interest rate.

• If you have an adjustable-rate mortgage (ARM), now is a great time to move to a fixed rate to avoid payment fluctuations in the future.

• Consider a modest cash-out refinance to pay down high interest rate loans or debt.   

As with any major financial decision, such as a refinancing or a new home purchase, we encourage all of our clients to reach out to us before making a final decision. Please don’t hesitate to reach out if you’d like to talk through your options and see if changing your mortgage rate or term aligns with your overall financial plan and goals.

Kali Hassinger, CFP®, CDFA®, is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® She has more than a decade of financial planning and insurance industry experience.

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Raymond James Financial Services and your Raymond James Financial Advisors do not solicit or offer residential mortgage products and are unable to accept any residential mortgage loan applications or to offer or negotiate terms of any such loan. You will be referred to a qualified Raymond James Bank employee for your residential mortgage lending needs.

Michigan Auto Insurance Reform: What You Need To Know

Contributed by: Kali Hassinger, CFP®, CDFA®

As of July 2020, legislation has gone into effect that changed Michigan’s no-fault auto insurance law.  Residents now have the option to elect their preferred level of Personal Injury Protection (PIP).  Personal Injury Protection is the piece of your insurance that pays for expenses if you’re injured in an auto accident, such as medical costs and lost wages.  Michigan’s law was unique to other no-fault states because residents were required to maintain insurance that provides unlimited medical benefits and covers the lifetime of the injured person. This became cost prohibitive over time, and an average of 20% of Michigan drivers are uninsured.

The new legislation now provides 6 different choices when electing your PIP medical coverage.  Under the new limits, the amount shown below is what the insurance company will pay per person per accident.  A slight premium reduction can also be expected with each choice, because in conjunction with these options, each auto insurance company is required to reduce PIP medical premiums for the next eight years. This may sound promising, but the Personal Injury Protection portion of your insurance only accounts for a small percentage of your overall premium.

1. Unlimited Coverage – Although this is the same coverage as required in the past, drivers can expect an average PIP premium reduction of about 10%

2. Up to $500,000 in PIP coverage – Drivers can expect a 20% reduction in PIP premium costs

3. Up to $250,00 in PIP coverage - Drivers can expect a 35% reduction in PIP premium costs

4. Up to $250,000 in coverage with PIP medical exclusions – This option is available for those with non-Medicare health insurance that covers auto injuries

5. Up to $50,000 in PIP coverage – Drivers can expect a 45% reduction in the PIP portion of their overall premium, but this is only available to individuals covered by Medicaid. Family or household members are required to maintain other auto or health insurance that will cover auto accident injuries.

6. PIP Medical Opt-Out – This is only available to those enrolled in Medicare (Parts A and B). Family or household members are required to maintain other auto or health insurance that will cover auto accident injuries. Although this option may seem tempting for those covered by Medicare, remember that long term care costs are not covered, regardless of whether or not they are due to sustained injuries from an auto accident.

Liability is another piece to consider when making your election. Those who select anything but unlimited PIP coverage may need to consider additional liability coverage.  The default minimum bodily injury coverage is $250,000 per person and $500,000 per incident, but there is an option to elect lesser amounts. 

Although it can be easy to focus on the premium reduction when electing your PIP coverage, being sure that you’re appropriately covered is always most important.  If you fail to make a specific election, unlimited PIP protection will be selected as a default. This may not be a bad thing, as medical costs continue to rise and most do not understand exactly what their healthcare insurance would cover in the event of an auto accident.  In most cases, auto insurance is actually more comprehensive in terms of healthcare coverage when accidents occur.  Each person’s situation is unique, but in terms of liability and healthcare coverage, protecting yourself and your family is of utmost importance.

Kali Hassinger, CFP®, CDFA®, is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® She has more than a decade of financial planning and insurance industry experience.

What’s the Difference Between a Roth and a Traditional IRA?

Contributed by: Kali Hassinger, CFP®, CDFA®

Many are focused on filing their taxes by April 15th, but that day is also the deadline to make a 2019 IRA contribution! With only a week left, how will you decide between making a Roth or a traditional IRA contribution? There are pros and cons to each type of retirement account, but your individual situation will determine the better option. Keep in mind, the IRS has rules to dictate who can make contributions, and when.

2019 Roth IRA Contribution Rules/Limits

• For single filers, the modified adjusted gross income (MAGI) limit is phased out between $122,000 and $137,000.

• For married filing jointly, the MAGI limit is phased out between $193,000 and $203,000

• Please keep in mind that for making contributions to this type of account, it makes no difference if you are covered by a qualified retirement plan at work (401k, 403b, etc.), you simply have to be under the income thresholds.

• The maximum contribution is $6,000 for those under the age of 50. For those who are 50 & older (and have earned income for the year), you can contribute an additional $1,000 each year.

2019 Traditional IRA Contributions

• For single filers covered by a company retirement plan, the deduction is phased out between $64,000 and $74,000 of MAGI.

• For married filers covered by a company retirement plan, the deduction is phased out between $103,000 and $123,000 of MAGI.

• For married filers not covered by a company plan, but have a spouse who is, the deduction for your IRA contribution is phased out between $193,000 and $203,000 of MAGI.

• The maximum contribution is $6,000 if you’re under the age of 50. For those who are 50 & older (and have earned income for the year), you can contribute an additional $1,000 each year.

Now, you may be wondering what type makes more sense for you (if you are eligible). Well, like many financial questions…it depends! 

Roth IRA Advantage

The benefit of a Roth IRA is that money grows tax deferred. So, when you are over age 59 1/2 and have held the money for 5 years, the money you take out is tax free. However, in exchange for tax free money, you don’t get an upfront tax deduction when investing the money in the Roth. You are paying your tax bill today rather than in the future. 

Traditional IRA Advantage

With a traditional IRA, you get a tax deduction the year you contribute money to the IRA. For example, a married couple filing jointly has a MAGI of $190,000 putting them in a 24% marginal tax bracket.  If they made a full $6,000 traditional IRA contribution they would save $1,440 in taxes. To make that same $6,000 contribution to a Roth, they would need to earn $7,895 to pay 24% in taxes in order to then make the $6,000 contribution. The drawback of the traditional IRA is that you will be taxed on it later in life when you begin making withdrawals in retirement. Withdrawals taken prior to age 59 1/2, may be subject to a 10% federal tax penalty.

Pay Now or Pay Later?

Future tax rates make it challenging to choose what account type is right for you. If you go the Roth IRA route, you will pay your tax bill now. The downside is that you could find yourself in a lower tax bracket in retirement. In that case, it would have been more lucrative to take the other route. And vice versa.

How Do I Decide?

We typically recommend Roth contributions to young professionals because their income will most likely increase over the years. However, if you need tax savings now, a traditional contribution may make more sense. A traditional IRA may be the best choice if your income is stable and you’re in a higher tax bracket.  However, you could be disqualified from making contributions based on access to other retirement plans. 

As always, before making any final decisions, it’s always a good idea to work with a qualified financial professional to help you understand what makes the most sense for you.

Kali Hassinger, CFP®, CDFA®, is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® She has more than a decade of financial planning and insurance industry experience.

RMDs Waived In 2020! Should I Make A Withdrawal Anyway?

Contributed by: Kali Hassinger, CFP®

If you read through our CARES Act blog you may have noticed a brief mention of the fact that Required Minimum Distributions are suspended for 2020. This change applies to all retirement accounts subject to RMDs such as IRAs, employer-sponsored plans like 401(k)s, and 403(b)s, and inherited retirement accounts.

If you are among the fortunate who only take RMD withdrawals because they are required, the CARES Act presents a real financial planning opportunity for 2020! The reduction in your income provides some wiggle room to implement other tax, income, and generational strategies.

ROTH CONVERSION

Moving money from a tax-deferred account to a tax-exempt account like a Roth IRA is a great long-term strategy to consider. Typically, RMDs must be withdrawn from the retirement account before any additional funds are allowed to be converted.

Account holders could now, in theory, convert their typical RMD amount into a Roth. Your taxable income wouldn’t be any higher than you’ve most likely planned for this year and you get the benefit of the Roth tax treatment in the future. Roth conversions are especially favorable with accounts that will ultimately be inherited by children/family members who are in higher tax brackets or if your IRA balance is significant. The SECURE Act of 2019 changed the rules for inherited retirement accounts, they are no longer able to be stretched out over the lifetime of the beneficiary. Now, a beneficiary must withdrawal the entire account balance within ten years of inheritance. Distributing a tax-deferred retirement account in ten years, which has often taken a lifetime to accumulate, could create substantial taxable income for the beneficiary.

Roth funds, however, maintain their tax-free withdrawal treatment from generation to generation!

Keep in mind that, unless certain criteria are met, Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted. Additionally, each converted amount may be subject to its own five-year holding period. Converting a traditional IRA into a Roth IRA has tax implications. Investors should consult a tax advisor before deciding to do a conversion.

TURN ON OTHER INCOME

For many in retirement, managing income to remain consistent is an integral part of their financial plan. In years when income fluctuates up, taxes due and Medicare premiums can be negatively impacted. The suspension of RMDs provides the opportunity to act on some of the strategies that you may be avoiding because of the tax implications. Non-Qualified Annuity withdrawals, for example, are taxed on a last-in, first-out basis. That means that growth is assumed to come out first and is taxable as ordinary income (note: the taxation of annuitized accounts differs). If you’ve been holding off on accessing a Non-Qualified Annuity to avoid the additional tax, this year could be an excellent opportunity to make a withdrawal instead of taking your RMD!

HARVEST GAINS

We’ve seen our fair share of market losses so far this year, and harvesting investment losses is an effective tax reduction strategy. However, for those who aren’t taking RMDs this year, it could be an opportunity to harvest gains instead. It isn’t uncommon to hold onto long-term investments, not necessarily because they are still desirable, but to avoid the capital gain taxation. 

If annual income is reduced by your RMD amount, there may be some wiggle room to lock-in those profits in a tax-efficient manner.

FILL UP YOUR TAX BRACKET

The Tax Cuts and Jobs Act of 2017 reduced income tax rates for many. If you are in a lower tax bracket now than you have been, historically withdrawing your Required Minimum Distribution amount (or more) may still be beneficial in the long term.  

The Tax Cuts and Jobs Act of 2017 reduced income tax rates for many. If you are in a lower tax bracket now than you have been historically, withdrawing your Required Minimum Distribution amount (or more) may still be beneficial in the long term. For those who have already taken their RMD for the year and wish they hadn’t, there are some options to reverse the withdrawal. The most straight forward choice, if the withdrawal occurred within the last 60 days, is to treat it as a 60 days rollover & redeposit the funds. It’s important to remember that you are only allowed one 60 day rollover per year. If you’re outside of that 60-day window, however, there is a CARES Act provision that allows COVID-19 related hardship withdrawals to be repaid within the next three years. This provision is expected to be broadly interpreted, but we do not have clarity on whether this hardship provision will apply to RMDs.

Be sure to discuss the options surrounding RMDs with both your financial planner and taxpreparer. Any income and tax changes should be examined before making a decision. Many times, reviewing your financial plan and goals can be a helpful exercise in determining what strategy is best for you!

Kali Hassinger, CFP®, CDFA®, is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® She has more than a decade of financial planning and insurance industry experience.

The Trillion-Dollar Stimulus On The Way – What You Need To Know About The CARES Act

Contributed by: Kali Hassinger, CFP®

 

As more states implement quarantine tactics, lawmakers in Washington struck a compromise on a major fiscal stimulus package to help combat the effects of the COVID-19 pandemic. The Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020 packs in a lot, with upwards of $2 trillion slated to provide critical support for the economy. In comparison, the American Recovery and Reinvestment Act of 2009 was $831 billion.

While we don't know the short or long term effects of this pandemic on the economy, the combination of monetary and fiscal stimulus efforts will hopefully serve as a bridge until regular economic activity can continue. Even with the largest spike in single-week unemployment claims ever, the optimism surrounding this stimulus helped the S&P 500 post its largest three-day rally (+17.6%) since April 1933.

Lawmakers put together this bipartisan package much more quickly than initially anticipated with crucial provisions to expand unemployment eligibility and benefits, small business relief, and even direct financial support to some US citizens. Here's what we know so far:

Checks Are Coming

Based on income and family makeup, some Americans can expect to receive a refundable tax credit as a direct payment from the government now!

Who is eligible? Eligibility is based on Adjusted Gross Income with benefits phasing out at the following levels:

• Married Filing Jointly: $150,000

• Head of Household: $112,500

• All other Filers: $75,000

The rebates are dispersed based on your 2018 or 2019 income (whichever is the most recent return the government has on file) but are actually for 2020.  This means that if your income in 2018 or 2019 phases you out of eligibility, but your 2020 income is lower and puts you below the phase-out (for example, lose your job in 2020, which many are experiencing), you won't receive the rebate payment until filing your 2020 taxes in 2021!  The good news is that those who do receive a rebate payment based on 2018 or 2019 income and, when filing 2020 taxes, find that their income exceeds the AGI thresholds, taxpayers won't be required to repay the benefit.

How much can I expect to receive?

• Married Filing Jointly: $2,400

• All other Filers: $1,200

• An additional credit of up to $500 for each child under the age of 17

If income is above the AGI limits shown above, the credit received will be reduced by $5 for each $100 of additional income.

When will I receive my benefit? The Timeline isn't clear at this point.  The CARES Act mandates that these payments be processed as soon as possible, but that term doesn't provide a firm deadline. 

Where will my money be sent?  The CARES Act authorizes payments to be sent to the same account where recipients have Social Security benefits deposited or where their most recent tax refund was deposited. Others will have their payment sent to the last known address on file.

Retirement Account Changes

• Required Minimum Distributions are waived in 2020

• Distributions due to COVID-19 Financial Hardship – Distributions up to $100,000 from IRAs and employer-sponsored retirement plans that are due to COVID-19 related financial hardships will receive special tax treatment. There will be no 10% penalty for individuals under the age of 59 ½ and the usual mandatory 20% Federal tax withholding will be waived.  Income, and therefore the taxes due from these distributions, can be spread over three tax years (2020, 2021, and 2022), and there is even the option to roll (or repay) distributions back into the retirement account(s) over the next three years.

• Loans from Employer-sponsored Retirement Plans – The maximum Loan amount was increased from $50,000 to $100,000 and allows account holders to borrow from 100% of their vested balance.  Repayment of these loans can be delayed one year.

Charitable Giving Tax Benefits 

• The CARES Act reinstates a possible above-the-line tax deduction for charitable donations up to $300.  This deduction is only available for taxpayers who do not itemize.

• For those who do itemize, the charitable deduction limit on cash gifted to charities is increased from 60% of Adjusted Gross Income to 100% of Adjusted Gross Income for 2020.  If someone gifts greater than 100% of their AGI, they can carry forward the charitable deduction for up to 5 years.  This does not apply to Donor Advised Fund contributions.

Student Loan Repayments

• Student loan payments are deferred, and loans will not accrue interest until the end of September.  Although the interest freeze will occur automatically, borrowers will have to contact their loan servicers and elect to stop payments during this period.

Expanded Unemployment Benefits

• Unlimited funding for Temporary Federal Pandemic Unemployment Compensation to provide workers laid off due to COVID-19 an additional $600 a week, on top of state benefits, for up to four months. This includes relief for self-employed individuals, furloughed employees, and gig workers who have lost contracts during the pandemic.

Small Businesses Support

• In the form of more than $350 billion, the CARES Act offers forgivable loans to help keep the business afloat, a paycheck protection plan, grants, and the ability to defer payment of payroll tax, to name a few.

Individual Healthcare

• HSAs and FSAs will now enable the purchase of over the counter medications as qualified medical expenses.  Medicare Part D participants must be allowed to request a 90 day supply of prescription medication, and if/when a COVID-19 vaccine becomes available, it must be free to those on Medicare.

Additional Healthcare Support

• $150 billion is allocated to hospitals and community health centers to provide treatment and equipment to fight coronavirus.

Education Funding

• $30 billion will be allocated to bolster state education and school funding.

State And Local Government Funding

• $150+ billion will be allocated to "state stabilization funds" to support reduced state and local tax receipts.

Other Provisions

• The CARES Act provides an additional $500 billion buffer for impacted and distressed industries, including the airlines, mass transit, and the postal service.

Depending on the length and impact this pandemic, lawmakers are already talking about another round of intervention in a phased approach.

Life may feel a little chaotic these days, but we hope you take comfort in knowing your financial plan was tailored to your risk tolerance, ability to handle market volatility, and overall financial goals. As always, we are here to answer your questions.

Kali Hassinger, CFP®, CDFA®, is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® She has more than a decade of financial planning and insurance industry experience.