|Recently, the world has watched with great interest as a few companies have seen surprising rallies in their stock prices. You may have read stories of individual investors gaining massive returns on their investments, thanks to this phenomenon. However, many of these same assets have quickly suffered steep declines following their initial boost.1|
During times like these, it can be tempting to pile into an asset that has seen such rapid growth. The excitement of the moment or the fear of missing out can cause even the savviest investor to act when they usually wouldn’t.
But what matters is what you do next. Right now, perhaps the best thing for your long-term future is to remove emotion from the equation. Remember, your investment strategy has been crafted to help pursue your long-term goals, regardless of what markets do in the short-term.
Volatile markets can be unnerving, but you’re always welcome to give me a call with your questions. Rest assured, we’re keeping a close eye on the markets, and most importantly, watching for any new long-term trends that may emerge on your behalf.
|1. CNBC.com, February 1, 2021|
|The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite, LLC, is not affiliated with the named representative, broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for gen|
When it comes to preparing yourself financially for a new year, starting early is often a smart move. For many Americans this winter, this may be doubly true. Considering the impact COVID-19 has had on the financial landscape, and the changes wrought by the CARES Act and the SECURE Act, there are some important items to remember.
Keep in mind, this article is for informational purposes only; it is not a replacement for real-life advice. Also, tax rules are constantly changing, and there is no guarantee that the tax landscape will remain the same in years ahead. With that in mind, let’s look at what you should be thinking about as we head into 2021.
The CARES Act
The CARES Act enabled any taxpayer with a Required Minimum Distribution (RMD) due in 2020 from certain retirement accounts to skip those RMDs. This effectively meant that retirement accounts could continue to potentially grow even as the economic outlook remained somewhat uncertain.1
Withdrawals from a traditional IRA, a 401(k), and other retirement plans are taxed as ordinary income and, if taken before the age of 59 1/2, may be subject to a 10 percent federal income tax penalty. However, as part of the CARES Act, many accessed their retirement funds in 2020 without being subject to the 10 percent penalty under certain circumstances, such as if their income was reduced.
The CARES Act also made changes for those with Health Savings Accounts, or HSAs. As you may recall, the IRS extended the federal income tax filing period from April 15, 2020, to July 15, 2020. Additionally, taxpayers were able to defer federal income tax payments until July 15, 2020, without the normal penalties and interest.
In addition, the CARES Act gave companies extra time to make contributions to employee HSAs in 2020, which may make for an even brighter 2021. In addition, it expanded what qualifies as a “reimbursable expense,” and over-the-counter medicine can be purchased with an HSA account. These new, broad uses for one’s HSA could help account holders soften the blow of medical care going into the new year.2
HSA limits were not adjusted in the CARES Act, however. They are $3,550 if you are single and $7,100 if you have a spouse or family. An additional annual “catch-up” contribution of up to $1,000 is allowed for each person in the household over age 55.2
Money taken out of an HSA for a nonmedical reason may be considered taxable income. If you make such a withdrawal before you turn 65, the withdrawn amount may be subject to a 20 percent federal tax penalty. HSA funds roll over year to year if you don’t spend them.3
The SECURE Act
Another piece of legislation that passed in late 2019 and began to be implemented in 2020 was the Setting Every Community Up For Retirement Enhancement Act, or SECURE Act. This impacted numerous financial areas, but there are two main changes to keep in mind for those looking ahead.
New IRA Rules
The legislation eliminated the required minimum distribution (RMD) rules in regard to defined contribution plans and Individual Retirement Account (IRA) balances upon the death of the account owner. Under the new rules, non-spouse beneficiaries are generally required to withdraw all the funds in the account by the end of the 10th calendar year following the year of the account owner’s death. In short, “stretching” an IRA over several generations is no longer allowed.4
It’s important to highlight that the new rule does not require the non-spouse beneficiary to take periodic withdrawals during the 10-year period. However, all the money must be withdrawn by the end of the 10th calendar year following the inheritance.
Some groups may have other minimum distribution requirements, including the surviving spouse of the IRA owner, disabled or chronically ill individuals, individuals who are not more than 10 years younger than the IRA owner, and any child of the IRA owner who has not reached the age of majority.
IRA Contributions and Distributions
Another major change in 2020 was the removal of the age limit for traditional IRA contributions. Before the SECURE Act, you were required to stop making contributions at age 70½. Now, you can continue to make contributions as long as you meet the earned-income requirement.5
Also, as part of the Act, you are mandated to begin taking required RMDs from a traditional IRA at age 72, an increase from the previous 70½. Allowing money to remain in a tax-deferred account for an additional 18 months (before needing to take an RMD) may alter some previous projections of your retirement income.5
The SECURE Act’s rule change for RMDs only affects Americans turning 70½ in 2020 or later. For these taxpayers, RMDs will become mandatory at age 72. If you meet this criterion, your first RMD won’t be necessary until April 1 of the year after you reach 72.
Avoid Taxing Surprises
For those actively employed, financial transactions made late in the year can have an unexpected impact on your taxes. These can include, but are not limited to, year-end and holiday bonuses or a special one-time dividend from a company (Note: dividends on common stocks are not fixed and can be decreased or eliminated on short notice). Depending on your situation, your taxes can become complicated rather quickly.
One choice to help simplify the process is to use the Internal Revenue Service’s Tax Withholding Estimator located at IRS. gov. This handy tool may help taxpayers better understand their tax situation so they can estimate their overall tax liability.6
Remember, this article is for illustrative purposes only. Please contact a tax, legal, or accounting professional before implementing a strategy or modifying an existing strategy when it comes to handling holiday bonuses or a special one-time dividend from a company.
The Best Financial Moves?
In truth, no two taxpayers are alike, and it’s important to find the strategy that best suits your unique situation. In a normal year, taxes and retirement preparation can be complicated financial events. As we’ve seen from the events of 2020, today’s financial landscape may be trickier to navigate than ever. But please remember, we’re here to help you every step of the way.
- IRS.gov, 2020
- Benefitspro.com, May 15, 2020
- Healthcare.gov, 2020
- Waysandmeans.house.gov, 2019
- MarketWatch.com, 2019
- IRS.gov, August 8, 2020
Julie M. Murphy, CFP®, CLU®, ChFC®, MBA
Securities offered through LPL Financial, Member FINRA/SIPC. Investment advisory services offered through Sequoia Wealth Management LLC, a registered
investment advisor. Sequoia Wealth Management LLC and JMC Wealth Management, Inc are separate entities from LPL Financial.
The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite, LLC, is not affiliated with the named representative, broker-dealer, or state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security.
Please consult your financial professional for additional information.
Copyright 2020 FMG Suite.
Love Your Life Today While Saving for Tomorrow
Your financial life is a balancing act, strung between living in the present and preparing for the future. Saving for retirement may be a focus, but it could feel like you’re missing out living in the present. There are three key areas, however, where saving big and investing may make a substantial difference in both the present and future alike: your home, your vehicle, and your travel plans.
Download this white paper to explore some smart strategies to address with your financial professional—ensuring that you’re able to enjoy your life in the present, while still building a solid foundation for your future.
- Powerful information that could potentially save you thousands in taxes andfees
- Tips to help put you one step ahead in your retirementpreparations
- Critical mistakes that cannot be corrected (and how to avoidthem)
HAVE YOU EVER SWITCHED JOBS?
Research shows that the average American employee switches jobs 12.3 times before retiring.1
Job changes can mean that many Americans have old 401(k) plans, which may not be allocated properly to help them prepare for retirement.
Every time you change jobs, you have some choices to make about your old 401(k). Generally, there are four basic options:
- You can leave the assets in your former employer’s plan ifpermitted.
- You can rollover the assets into your new employer’s plan if one is available.
- You can roll the assets over into an Individual Retirement Account(IRA).
- You can take a cash distribution (and deal with the potential taxconsequences).
Each of these options has advantages and disadvantages to consider. In this special report, we’ll help you hopefully avoidcommon(andexpensive)mistakesandshowhowyoucanuseyour401(k)asa tool to help with your retirementpreparations.
1. Roll Over Your 401(k) to Access More InvestmentChoices (That Benefit YOU)
Every investor is different, and volatile markets make customized strategies important when pursuing your financial objectives. Workplace retirement strategies often offer limited investment options that may not be right foryour financial situation. In contrast, IRAs can hold nearly any type of investment, which allows for flexibility in your investment strategies. By rolling over your 401(k) savings into an IRA, you open up a universe of investment options that you can use to build an investment strategy aligned with your long-term goals.
Under the 2019 SECURE Act, in most circumstances, you must begin taking required minimum distributions from your 401(k) in the year you turn 72. Withdrawals from your 401(k) or other defined contribution plans are taxed as ordinary income, and if taken before age 59½, may be subject to a 10% federal income tax penalty. Also, once you reach age 72, you must begin taking required minimum distributions from a Traditional IRA. Withdrawals from Traditional IRAs are taxed as ordinary income, and if taken before age 59½, may be subject to a 10% federal income tax penalty. Under the SECURE Act, you may continue to contribute to a Traditional IRA past age 70½, as long as you meet the earned-income requirement. The CARES Act has allowed some one-time exceptions to distributions and penalties in 2020. These rules can be difficult to understand. So, please, contact us, and we will provide the most up- to-dateinformation.
2. Understanding Expenses
401(k)s and other workplace retirement accounts come with administrative fees and expenses, which may take a big bite out of your investment gains. IRAs also have fee structures that include various fees and expenses.
As independent financial professionals, we’re committed to making certain you understand what costs are associated with your IRA. We believe in being completely transparent about the costs and fees associated with any investment we recommend. We work with each of our clients to find investments that are best suited to their needs and long-term goals.
3. Don’t Be Tempted to CashOut!
When our clients come to us for guidance on rolling over a 401(k) or other workplace retirement strategy, we walk them through the four options previously discussed.
One of those options is liquidating your old plan and receiving the money directly. While it can be tempting to see your savings as a quick source of cash, cashing out can be a big mistake that may cost you thousands in penalties and taxes,and it may prohibit you from years of future growth.
If instead, you decide to take a distribution from your old plan or don’t roll over the assets within the 60-day window, you will trigger an IRS reporting,and potentially, saddle yourself with a big tax bill.Taking a check from your old plan administrator will require an automatic 20% withholding tax and be reported to the IRS.2,3
If you delay moving the assets to your IRA account, you could miss your 60-day window and be forced to pay penalties and taxes on your entiredistribution.
One of the best arguments in favor of rolling over your old retirement plan is that it can help simplify your life. In our experience, investors tend to lose track of accounts that aren’t right in front of them. Life gets busy, and failing to modify your investment strategies to keep up with your needs can undermine your long-term financial success. Putting your assets in one place can help ensure that your investments are reviewed regularly and remain consistent with your financial goals. As a former employee, dependent on the plan, you may not be abletomakechangestoyourinvestments,preventingyou from adjustingyourallocationstofit yourcurrentcircumstances and long-term goals.
Why Work with a Financial Professional?
One of the benefits of working with a firm like ours is the comfort of knowing that you have a team of professionals continuously monitoring your investments and keeping you on track.
Investments are just one piece of your overall financial picture. As professionals, we take every aspect of your financial life into consideration when building customized strategies for your retirement. To take one example, many investors fail to consider how taxes may affect their investment returns.
By not taking taxes into consideration, a hypothetical $150,000 portfolio could lose nearly
$500,000 to taxes over 30 years.4Tax-efficient investing strategies can help you manage your tax burden.
Please remember: this hypothetical example that’s used to illustrate one potential situation. It’s not a replacement for real-life advice, so make sure to consult your tax, legal, and accounting professionals before modifying your strategy if you’re concerned about your total tax obligation over time.
What Should You Do Next?
Whether you’re leaving your job to pursue other opportunities or on the wrong side of the economic downturn, the transition can be a stressful experience. Discussing your situation with a financial professional who specializes in working with executives can help you relax and explore all your options.
RESERVE YOUR FREE FINANCIAL STRATEGY SESSION TODAY
Fill out the form to the right, and in our complimentary session, we’ll take a look at your current financial situation and present you with strategies that make the most sense for you and your financial future.
WE’LL TEACH YOU:
- How to negotiate the best settlement or compensationpackage
- What to consider if you own companystock
- The dangers of holding too much companystock
- How to prevent job losses or money emergencies from derailing your financialfuture
We developed this session format after helping hundreds of clients manage their finances during critical life transitions.
To schedule your no-obligation session, please call our office at 312.275.1900
FOOTNOTES & SOURCES
Bureau of Labor Statistics, August 22, 2019
Please discuss taxation issues with a qualified tax specialist.
IRS.gov, February 6, 2020
Calculation assumes initial investment of $150,000, a 7% compound annual return over 30 years with a 2% loss to taxes, and no contributions or withdrawals. Example excludes the effects of interest, dividends, fees, and inflation. This hypothetical example is not representative of any specific investment. Your results may vary.