Over the last few weeks, COVID-19 has put a significant strain on the lives of every American, personally as well as financially. First and foremost, we’re protecting our families and the health of those around us during these times. Many also are struggling with how to adapt to the recent economic decline and bear market that has taken hold over the last month as the spread of COVID-19 makes its way throughout the United States. 

While the current pandemic causes a lot of uncertainty around our financial lives, it also creates opportunities to adjust your financial plan and investment portfolio to better position yourself and your family for the future. This article covers some financial planning and investment strategies to consider as we work our way through the challenging economic and market environment that we find ourselves in. We recommend you consult with your tax advisor and wealth advisor before following through on any of the following strategies.  

Roth IRA Conversion

If your traditional individual retirement account (IRA) balance is lower during this economic/market downturn, a partial or full conversion to a Roth IRA could make sense. Once in the Roth IRA, these assets will grow tax-free and be distributed free of taxes after age 59 1/2 once the five-year holding period is met. You’ll owe ordinary state and federal income taxes on the amount converted to a Roth IRA. A conversion could be beneficial if any of the following apply to you:

  • Your taxable income will be lower in the year of the conversion.
  • You have excess cash available outside of your retirement accounts to pay any state/federal taxes owed from the conversion. 
  • Your tax rate in retirement will be higher than it is now and/or you want to avoid required minimum distributions at age 72, which the IRS mandates on a traditional IRA.

With the elimination of the “stretch IRA” for beneficiaries under the SECURE Act of 2019, a Roth IRA also may be a better option for your nonspouse beneficiaries when they inherit the account, as they will not be taxed on any distributions either. Under the Tax Cuts and Jobs Act, any Roth conversion you make is permanent and cannot be recharacterized back to a traditional IRA, as was the case under previous tax law. To make sure this is the right decision for you, we recommend consulting with your tax advisor and your wealth advisor before making a Roth IRA conversion.  

Make a 2019/2020 IRA Contribution

There’s still time to make a 2019 IRA contribution (the deadline is now July 15 for 2019 contributions) to take advantage of deflated prices. Contributions will grow tax-deferred in a traditional IRA and tax-free in a Roth IRA. For both 2019 and 2020, the total contribution to your traditional or Roth IRAs cannot exceed $6,000 ($7,000 if above age 50) or your earned income for the year, whichever is less. If you are age 70 1/2 or older, you cannot contribute to a traditional IRA for 2019; however, you can still contribute to a Roth IRA if eligible. For 2020 there’s no age limit on making contributions to your traditional IRA. If you file a joint return, both you and your spouse may be able to contribute to an IRA even if your spouse didn’t have any earned income for the year. Take advantage of low prices now to boost your potential for long-term gains.

Mortgage Refinancing

With rates hovering near all-time lows, millions of Americans currently stand to benefit from refinancing their current mortgages into new loans. There are still many factors to consider when determining if a refinance is right for you:

  1. How long do you plan to stay in your current home?
  2. What’s the length to maturity on your current loan? 
  3. What’s your goal for refinancing: pay off your loan faster, decrease payments, new terms, etc.? 
  4. What are the closing costs? 

Due to the recent surge in demand for refinancing, you may find that actual rates are higher than expected or advertised, so be sure to shop around. With the Federal Reserve recently cutting the federal funds rate (the rate banks charge one another to borrow money overnight) to nearly zero, it’s worth noting that mortgage rates will not necessarily fall in lockstep. 

While there is no one-size-fits-all answer when it comes to refinancing, if this is something you have been considering, now is a great time to see what options are available. While the prospect of a lower interest rate or monthly payment is appealing, it’s also important to remember that just because you can, doesn’t mean you should. 

Many people are without jobs and income during these times and will have trouble making their monthly mortgage/rent payments. On March 21, President Trump ordered foreclosures and evictions to cease for 60 days. Many banks have already announced options for those struggling to make their mortgage payments. While there’s the potential for a national program to be announced in the future, it is advisable to reach out to your lender to discuss what options are available to you if you cannot make your payments on time.

Rebalancing & Investing Excess Cash

With the stock market substantially off its recent high, it’s likely your portfolio allocation has drifted from its long-term target. If so, the current market environment presents an opportunity to rebalance your portfolio back to its original target by selling securities that have held their value and purchasing securities that are depressed in price. 

You may be holding on to excess cash that is not currently invested in the market. Like rebalancing, the current market environment presents a unique opportunity to put this cash to work if you are planning to invest for the long term. While rebalancing and/or adding cash to your portfolio may not be comfortable, taking advantage of depressed prices can help set you up for potential long-term positive returns. During these uncertain times, it is important to remember that no one knows when the market will bottom, but since 1950, every bear market, which we’re currently in, has resolved to the upside. 

Tax Loss Harvesting

To put lower stock prices to work for you, one tax-mitigating opportunity could be to sell assets in your taxable account(s) that are currently below their cost basis. This will create realized losses for tax purposes that can offset gains that may be realized throughout the year. In addition to offsetting gains, a tax loss can offset up to $3,000 of noninvestment income. Any unused tax loss can be carried forward to future years, up until the account owner’s death. The proceeds from a tax loss sale can then be used to either rebalance your portfolio and/or to buy an asset similar to what was sold. By leveraging your losses, you can decrease your tax bill and potentially increase the return on your portfolio over the long term. 

Many charities are struggling as well during these times. For individuals who typically donate appreciated stocks to charities, doing so in a depressed market environment may be less attractive. Another option is to donate some of the cash generated from tax loss harvesting to a charity you support. You still get to use the loss for your personal taxes and use the tax deduction for the gift if you plan to itemize deductions—and, more importantly, you are supporting the charity.  

BKD COVID-19 Resource Center 

This is an unprecedented time with many challenges and uncertainties. In response, BKD has created a COVID-19 Resource Center to help disseminate important information for our clients and friends as we evaluate ways to mitigate the inevitable financial effects. Through this resource center, we will keep you up to date with relevant news, changing guidelines, new regulations and anything else we believe you need to know.

Be sure to reach out to your BKD Trusted Advisor™ or use the Contact Us form below if you have questions or would like to discuss the financial planning strategies included in this article.

FORVIS Private Client services may include investment advisory services provided by FORVIS Wealth Advisors, LLC, an SEC-registered investment adviser, and/or accounting, tax, and related solutions provided by FORVIS, LLP. The information in this presentation should not be considered investment advice to you, nor an offer to buy or sell any securities or financial instruments. The services, or investment strategies, mentioned in this presentation may not be available to, or suitable, for you. Consult a financial advisor or tax professional before implementing any investment, tax, or other strategy mentioned herein. The information herein is believed to be accurate as of the time it is presented and it may become inaccurate or outdated with the passage of time. Past performance does not guarantee future performance. All investments may lose money.

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