Financial Planning During The Pandemic

Since the S&P 500 set a record on February 19th we have seen a dramatic drop over the past 2 months and although there has been some recovery we will not know the long-term impact on the market for quite some time. The second quarter US GDP (Gross Domestic Product) declined by 29% and unemployment has risen to rates only matched by the great depression.

Now for the good news.

This is not a financial crisis in typical terms. Yes, the value of stocks dropped, but this was to raise cash with the uncertainty of the pandemic, not the profitability of companies. Hopefully, we will see a strong recovery in the market as we reopen.

I say hopefully because we have never experienced this in the past and have nothing to benchmark against the recovery. I believe that the stock market will recover better than the long-term prospects for fixed investments such as bonds and CD’s.

With interest rates historically low, the government is expected to expand its own debt beyond 30 trillion dollars. This will put pressure on other savings vehicles to stay low. Current rates for savings, money markets and CD’s range between 0-.5%.

This creates a savers’ dilemma where they are forced to either accept the low rates or put their money at risk in the stock market.

This will be a tough market to navigate, but there is another looming challenge and one that before this even happened I have been trying to educate people about. That is the impact of taxes on your qualified retirement accounts. These are your 401(k), 403(b), and IRA plans.

Three Key Events That Impact Taxation of Qualified Plans

First is the Trump tax plan that affects taxes from 2018 to 2025. The tax plan provides a limited opportunity to withdraw money from these plans at historically low rates. For many that saved in these plans, it is exactly what they hoped they would do.

The original goal was to save money at a high tax bracket and withdraw at a lower bracket. This makes our current situation ideal to implement a strategy to pay the lowest taxes on our retirement plans.

I can analyze your situation to determine how to best use this opportunity.

The second event has been the December 2019 Secure Act, which changed the date you have to take required minimum distributions (RMD) from qualified plans. The age was pushed out to 72 from 70 1/2, which is a significant change.

The big change is that qualified accounts that used to be allowed to be paid out or “stretched” over the lifetime of the beneficiaries means spouses and limited others must take distributions in a 10-year period. This compression of distributions can increase the taxes due and reduce the amount of money that beneficiaries receive.

The third and most obvious event is the COVID-19 pandemic. As Treasury Secretary Mnuchin said, we need to get this stimulus money out as quick as possible and will worry about how we pay for it later.

When we talk about paying for this stimulus, we are talking about taxes. This is because that is how the government is funded. It could be changes in tax brackets, rates, changes or reductions of deductions or changes in what is subject to taxes. For those on Social Security, that could mean having all of your benefits subject to taxes instead of 85%. All would increase your taxes.

Don’t Let The Pandemic Derail Your Retirement Plans

I have been in the retirement planning business for over 27 years and a CERTIFIED FINANCIAL PLANNER™ practitioner for 15 years and I know many advisors that do a great job managing money and providing income solutions, but where I feel it is incomplete is in the area of taxes.

My focus is not on what you make, but what you keep.

This is where taxes have a significant impact on your retirement. In the past few years, I have transitioned my practice to specializing in helping people reduce these taxes. I can analyze the tax implications of your retirement accounts and propose alternatives that reduce total taxes.

With the market being down, it is a perfect time to rebalance and pay taxes on lower balances, while positioning your accounts to take advantage of growth.

If you have qualified account balances of more than $500,000 this tax analysis is crucial to your long-term income plans and for those with lower balances may still be important. In either case, I am happy to provide you with the analysis to help you make an educated decision.

Finally, I built Retirement Resource Management to help clients maximize the resources they have available in retirement. This is paying less taxes, referring to qualified money managers and protecting what you have worked so hard for through long-term care and life insurance for the tax efficient transfer of wealth to your heirs.

If you would like a free analysis, please contact me either by phone or email and I will be happy to help.

Thanks

Steven W Gaito, CFP®

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Steve Gaito

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