The IRS announced on Tuesday, June 23, 2020, via Notice 2020-51 (PDF), additional relief relating to Required Minimum Distributions (RMD), allowing you to return RMD funds withdrawn after January 1, 2020.
As it sits now, the CARES Act RMD waiver for 2020 is still in place, meaning that you are not required to take an RMD for 2020. This applies to defined-contribution plans such as 401(k) or 403(b) plans and IRA accounts. Those who have previously taken RMDs are likely familiar with the process; but for those who turned 70 ½ in 2019, this all may be brand new, and it’s important to understand the timeframes. This can easily be confused with the SECURE Act which passed toward the end of 2019, changing the RMD age to 72 going forward. Tuesday’s announcement extends relief to anyone who has previously taken an RMD in 2020 by extending the opportunity to return the funds up through August 31st, 2020. In addition, if you return funds under this new announcement, the notice states that the repayment is not subject to the one rollover per 12-month period or the rollover restrictions with inherited IRAs. This is particularly important because the SECURE Act changed the timeframe in which beneficiaries are required to withdraw inherited IRA funds. To find information about the SECURE Act changes, Paige Lee, CFA, wrote a great article which can be found here. There is a lot going on here, and the overall message is that you have more flexibility than ever on how you treat a 2020 RMD.
What was the original relief for RMDs?
The CARES Act (Coronavirus Aid, Relief, and Economic Security Act) was signed into law on March 27th, 2020, providing relief amidst the COVID-19 pandemic for many American taxpayers and businesses. We posted a blog that summarizes these changes which can be found here. In respect to RMDs, the CARES Act originally allowed individuals to forego taking a 2020 RMD and allowed you to return any RMD taken within the previous 60 days. Despite being a fantastic planning opportunity, anyone who took an RMD earlier that the previous 60 days was left out in the cold. Later in April, the IRS issued a follow-up notice that extended the time period to include those who took an RMD between February 1 and May 15 where the funds could be returned by July 15th. This is no longer the case with the most recent announcement, and now anyone who has taken an RMD from January 1st, 2020, can make the decision to return the funds.
How can you take advantage of this?
This offers a tremendous planning opportunity by providing households with the ability to shift income and take advantage of market conditions. Returning an RMD can lead to a host of strategic financial moves including the following:
Continued growth of tax-deferred assets
Opening room to make Roth IRA conversions
A chance to look at taxable accounts to see if it makes sense to withdraw funds at capital gain rates as opposed to marginal tax rates
Rebalancing—as the funds are returned, holdings can be adjusted to shore up your overall allocation
We help our clients make the best choices with the information available, and now that this new extension has been issued, we view this as an opportunity to review your circumstances, discuss the various options, and decide on whether or not to take action.
Connect with Merriman to discuss.
Here at Merriman, we are very excited about this announcement and strongly encourage you to contact us if you have already taken an RMD from your IRA or Inherited IRA this year. We’ll help you understand and explore your options and determine if taking advantage of this extended RMD relief makes sense for you.
As we’re experiencing such a strange and challenging time, many people find themselves wondering what their families did in the past to get through difficult economic times. We may remember little snippets of stories told by our elders or passed on through our family, but often wish we knew more.
As wealth advisors we know firsthand the importance of legacy planning through legal documents and also believe in the value of sharing the essence of who you are for future generations to come. In this document, we provide ideas on how to craft a Family Legacy Letter to share your life story, personal values, beliefs, and advice for future generations.
Now is a great time to pass on your values and share experiences with your heirs.
The Setting Every Community Up for Retirement Enhancement (SECURE) Act passed in late 2019, creating significant retirement and tax reforms with the goal of making retirement savings accessible to more Americans. We wrote a blog article detailing the major changes from this piece of legislation.
We’re going to dive deeper into some of the questions we’ve been receiving from our clients to shed more light on topics raised by the new legislation. We have divided these questions into six major themes; charitable giving, estate planning, Roth conversions, taxes, stretching IRA distributions, and trusts as beneficiaries. Here is our third of six installments on the SECURE Act and how it could impact you.
Given the new rules for inherited IRAs, who should be considering changes to their estate plan?
IRA owners will need to evaluate how changes in the SECURE Act impact estate planning and beneficiaries. If you have a small Traditional IRA and plan to leave your assets to several beneficiaries, the accelerated income your beneficiaries will receive from distributing their share of your IRA within 10 years of your passing may not significantly affect their taxes. However, if you have a very large IRA balance or plan to leave your assets to only one or two people, distributions could push your beneficiaries into higher tax brackets. It will be important to evaluate your tax situation and potential taxes to your heirs to determine if it makes sense to accelerate IRA distributions or conversions during your lifetime.
Here are some strategies you might consider:
Leave IRAs to multiple beneficiaries: Here, each person receives income from a smaller portion of the account, which reduces the likelihood of pushing them into a higher tax bracket.
Make Roth conversions: IRA owners can evaluate their personal tax situation compared to their beneficiaries. For example, if large inherited IRA distributions would likely push beneficiaries into higher tax brackets like the 32% marginal rate, an account owner might have an opportunity to convert some assets to a Roth IRA now at a lower rate. Current owners may be able to convert at a lower tax rate if they have a more favorable tax situation (e.g. earning less ordinary income) or can spread out conversions. Planning Roth conversions throughout retirement at lower rates can reduce the taxable portion of future inherited IRAs.
Evaluate Trust structures: Many people name a trust as the beneficiary of their IRA, and they need to evaluate their trust structure following the implementation of the SECURE Act to make sure the trust is properly drafted to account for new provisions in the law. Commonly used trust structures like conduit and accumulation trusts, or those with “see-through” provisions, are affected by changes in the new law. Existing conduit trusts could face issues with how RMDs are distributed to beneficiaries, and accumulation trusts may need to include flexibility for discretionary distributions to allow tax-efficient planning. We can help facilitate a review with your estate attorney or recommend one of our trusted professionals to evaluate your plan.
As with all new legislation, we will continue to track the changes as they unfold and notify you of any pertinent developments that may affect your financial plan. If you have further questions, please reach out to us.
Disclosure: The material provided is current as of the date presented, and is for informational purposes only, and does not intend to address the financial objectives, situation, or specific needs of any individual investor. Any information is for illustrative purposes only, and is not intended to serve as personalized tax and/or investment advice since the availability and effectiveness of any strategy is dependent upon your individual facts and circumstances. Investors should consult with a financial professional to discuss the appropriateness of the strategies discussed.
Because of the pandemic, many companies are trying to rapidly reduce their workforces. Boeing recently offered their voluntary layoff (VLO) to encourage employees near retirement to do so. Other companies will resort to traditional layoffs.
What should you do when you find yourself unexpectedly retired—whether voluntarily or not?
Assess the Situation—Review Your Numbers
Retirement is a major life change for everyone—even more so when it happens unexpectedly. The first step financially is to get a clear picture of your assets. This includes investment accounts and savings. It also includes debts like credit cards and mortgages. In addition, you’ll want to identify current or future sources of income such as pensions or Social Security.
Next, you’ll want to be clear about how much you’re spending. Free or low-cost tools like mint or YNAB can help you easily track how much you’re spending as well as categorize your expenses. That may make it easier to see if there are ways to reduce costs, if needed.
Knowing your minimum monthly costs is a major part of determining if you have the resources to retire successfully or if you need to find another way to work and earn money before retirement.
If you’re unexpectedly retired, identify if you need to reduce your expenses. Some of those reductions may happen automatically—most families aren’t spending as much on travel right now—while other reductions may require more planning.
You’ll want to account for healthcare costs. For some, employers may continue to provide health coverage until Medicare begins at age 65. For others, health insurance will have to be purchased either through COBRA to maintain the current health insurance or through the individual markets. These policies can cost significantly more than when the employee was working, although by carefully structuring income, it may be possible to get subsidies to reduce this cost.
Identify if you need additional sources of income. This may come from part-time employment. It may also come from reviewing your Social Security strategy. Social Security benefits can begin as early as age 62, although doing so will permanently reduce your benefit. Take time to compare the tradeoffs of starting your Social Security benefit at different ages.
Finally, review your investment allocation. You’ll want to make sure you have an appropriate percentage providing stability (cash, CDs, short-term bonds) to protect you from the fluctuation of the market when you need the money. With a retirement period of 30 years or more, stocks will likely be an important part of your investment strategy, too.
Do Some Tax Planning
It’s important to identify what mix of accounts you have. IRA, Roth, and taxable accounts are all taxed differently. It’s often best to spend from the taxable account first, then the IRA, and save Roth accounts for last, although there may be times where it’s better to use a mix from different types of accounts each year.
Many early retirees temporarily find themselves in a lower tax bracket because they don’t have a salary and they haven’t yet started Social Security. This may be a time to take advantage of Roth conversions. Moving money from a traditional retirement account to a Roth account now, while you’re in a lower tax bracket, can significantly reduce taxes over your lifetime.
Planning Beyond Money
When a major change like this occurs, it’s important to take care of your finances. It’s also important to take care of your mental health. Retirees often have years to plan for this major life change. Because of the pandemic, many are making this change suddenly and unexpectedly.
It’s essential to take the time to set a new routine and identify new hobbies or other activities to incorporate into your life.
When retirement is unexpected, it doesn’t have to be scary. Building a financial plan to determine if you’re on track to meeting your goals, to discern what adjustments should be made to help you reach those goals, then to execute that plan can help provide the peace of mind brought about by a successful retirement—even when it comes sooner than expected. If you want help with this process, reach out to us.
COVID-19 is causing different challenges for everyone. Things that were once easy have become more complicated and time consuming, especially when it pertains to financial decisions. Deciding whether to renovate your home or move into a new one in the midst of this global pandemic for one, comes with added stressors. Try some of these helpful tips to take the financial anxiety out of moving or remodeling and make this milestone a little easier in the midst of these uncertain times.
Consider the area:
Location is more than just your home – consider the school district, surrounding community, neighborhood and amount of land. Most will agree location is everything, and If you love the location of your current home, that is a great enough reason to stay put. However, if you’re still adamant about moving for other reasons, these location factors could attract potential buyers as well… let’s review your options.
Renovating your home may require more than just a fresh coat of paint, and instead could mean much needed addition. If you plan to expand your family or if you just want more space, first determine whether your current property can accommodate the addition or renovation. The growth of your family may require more bedrooms or a larger common room, but if your home and property size are too small to make an addition, this may be a sign to move.
Another consideration is the community you live in. Whether it’s a cozy village, offers great community activities, or you just love your neighborhood, these are the things you may miss if you move to another area. The same sentiment goes for the school district. If it’s highly rated and you have kids in school, it might be worth staying in the area. If you decide moving is the best option for you and your growing family, look for a home in the area that checks off all of the boxes, while offering the space you need!
Keep all of these considerations in mind when looking for a buyer as well. If you are an empty nester contemplating moving, these details may be important for a young family looking to move into a top school district. Have your home appraised and research recent comparable homes sold in your area to decide if yours could be an easy sell in the current market.
Review your finances:
Buying a home is always an investment. If that’s the side you’re leaning toward, you have to consider if you’re financially ready to go through the process. Right now, mortgage rates are at an all-time low due to COVID-19, and that may be enough to sway you in the direction of buying a new home. However, you may need to invest in minor upgrades to your current home before listing it to sell, as well as pay an agent and movers. Set extra money aside for these improvements when budgeting for the big move. You may also want to consider keeping your current home to rent on Airbnb for added income, while buying a second home to live in.
If you’re leaning toward renovating your current home and staying long-term, you have a multitude of choices to consider depending on your financial situation. Home equity loans are an option for homeowners with a decent amount of equity built up in their purchase. Usually, if you’ve owned your home for five years or more, you can take out this loan to use for whatever you’d like. Most homeowners choose to use a home equity loan or line of credit for home upgrades but you can also consider liquidating investments, using a personal loan, margin loan, or pledged asset line of credit. Be sure to pay attention to interest rates, as they may be higher for these types of loans considering the economic times.
Be aware of timing:
Due to COVID-19, selling your home or starting renovations will take longer than usual. We are living in unprecedented times, where those who can help you sell or update your home are finding unique and optimal ways to get their jobs done, while still experiencing some barriers that may slow their services down. Be patient,and use this time to connect with your renovators or realtors to find or build your perfect home.
Right now, it’s smartest to work with a realtor if you’ve decided to sell your home. Viewings have to be done virtually for the time being and you will strongly benefit from using a realtor to advertise your home online. Be aware that selling your home may take longer than in years past because many people feel less secure in their finances. Additionally, it’s hard for a buyer to make this decision without seeing their potential new home in person.
On the other hand, finding a contractor won’t be easy either. All over the country, home renovation projects are being delayed or cancelled due to stay at home orders. However, some states have recently allowed construction workers back on the job, deeming them essential. If your desired contractor is able to work and follows all CDC regulations, you can likely get your home renovation started now!
Written By: Erick Aguayo, Chief Compliance Officer
During these uncertain times, it is important to remain vigilant and practice safe internet habits. The global spread of coronavirus has unfortunately resulted in a growth of digital scams, with cybercriminals aiming to profit from people’s fears and their desire for information related to COVID-19. This massive increase in cybercriminal activity coupled with the impact COVID-19 has had on our lives makes life difficult and can feel understandably overwhelming.
Scams related to COVID-19 and the recently passed CARES Act include robocalls, texts, and email phishing attempts from criminals posing as representatives from the Internal Revenue Service (IRS), World Health Organization (WHO), and Centers for Disease Control (CDC). Email recipients have been tricked into downloading malicious software by clicking on links and attachments. Other scams include cybercriminals posing as legitimate businesses claiming to sell products like facemasks, hand sanitizers and medications to help avoid COVID-19. As of the end of March, more than 7,800 U.S consumer complaints have been filed with the Federal Trade Commission (FTC), with an average loss of nearly $600 per victim.[i]
During such difficult times with COVID-19 dominating the headlines and impacting our lives, it is important to remember that everyone can practice safe Internet practices and prevent themselves from being victims of cybercrime. We have control over how we interact with emails, answer calls, and respond to solicitations, whether we are in a crisis or not. The Cybersecurity and Infrastructure Security Agency (CISA), a division of the Department of Homeland Security urges everyone to exercise caution in handling emails received with a COVID-19-related subject line, attachment, or hyperlink.[ii] We should also be careful with social media posts, texts, or calls related to the coronavirus pandemic. Best practices for defending against these cyber scams include:
Never give personal information to unsolicited requests over the phone or in email.
Don’t click on links in unsolicited emails and exercise caution when downloading email attachments.
Use trusted government websites such as the CDC’s and the WHO’s for official COVID-19 information and updates.
Don’t respond to unsolicited emails urging you to act promptly to prevent or cope with COVID-19.
Set strong passwords with a combination of numbers, letters, and symbols to secure your email, financial, health, and personal accounts.
Verify a charity’s legitimacy before making donations online or over the phone. Review the Federal Trade Commission’s advice about avoiding charity scams to make sure your donation will actually go to an organization you want to support.
Do not respond to emails from unknown sources requesting personal, financial, or health information.
Report any fraud or cyber scams to the Federal Trade Commission: gov/complaint.
At Merriman, we have measures in place to safeguard your information, such as enhancements to how we share sensitive information with you and trusted professionals, and the use of multi-factor authentication solutions to secure access to critical data systems. These investments in employee training and cybersecurity over the years have also enabled us to better detect and respond to email phishing attempts and fraudulent requests for funds. We value your trust and will continue to take the necessary steps, like calling you directly to verify an information or money request we receive over email, as part of our ongoing mission to protect your information and financial assets. This is always an area of focus for our employees, but especially as our team continues to work from home for the next several weeks.
We hope that as you spend more time indoors and online, you do so safely and keep an eye out for cyber and robocall scams. Although it is understandable to feel overwhelmed by all the COVID-19 headlines, it is important to remain informed, vigilant, and remember that practicing some basic safety measures can greatly reduce your chances of falling victim to these scams.
[i] Joseph Marks & Tonya Riley, The Cybersecurity 202: Coronavirus pandemic unleashes unprecedented number of online scams, Washington Post, (April 1, 2020)
[ii] CISA, Defending Against COVID-19 Cyber Scams, Department of Homeland Security, (March 6, 2020)