As the saying goes, the only thing we value more than our wealth, is our health and that of our loved ones.

The last few months have given us reason to pause on both fronts. We hope this message finds you well, and we will defer to the doctors on the best approach for staying healthy.

We do have some tips for stewarding your wealth during the current market environment and with the Coronavirus Aid Relief and Economic Security (CARES) Act. As financial advisors, our bias is to focus on the most important rather than the most topical; however, we recognize that many are asking what they can do right now.

With the economic impact of COVID-19, the U.S. stock market is currently down over 20 percent for the year and 10-year U.S. Treasuries are yielding under 1 percent (as of 4/1/2020). We acknowledge these are challenging times and yet there are also potential opportunities for actions to be taken now and over the long term to strengthen your financial position.

What to do

NOW: In times like these…

Review Required Minimum Distributions (RMDs)+

The CARES Act waives required minimum distributions (RMDs) from retirement accounts for 2020.
If you have been subject to RMDs from your retirement accounts, or an inherited IRA, will be important to review your withdrawal strategy for 2020 and beyond.
While the waiver of RMDs does apply to inherited IRAs, it will be less applicable for those who inherit IRAs due to a death in 2020 as beneficiaries will generally have up to 10 years to withdraw the total balance.
It may still be appropriate for you to take a distribution in 2020 if you need the taxable income to offset other deductions, such as charitable deductions or if you are looking to stabilize and spread your income out over time to manage your tax bracket.
If you don’t need the income, it may make sense to convert any planned distribution into a Roth IRA, using up your lower tax brackets. See additional information on this strategy here.
If you have already taken all or a part of your RMD this year, there may be opportunities to return those funds to the retirement account. Here are two options to discuss further with your portfolio manager and tax advisor:
- Indirect rollover: The IRS typically allows one indirect rollover in any 12-month period and requires the redeposit within 60 days of the withdrawl. The CARES Act increases the flexibility so that IRA owners may recontribute any 2020 withdrawls and avoid taxation of the distribution so long as the recontribution is completed by August 31, 2020. The most recent guidance, IRS Notice 2020-51, further allows inherited IRA owners to recontribute withdrawls and confirms the RMD waiver does not apply to defined-benefit plans. Note that the full amount withdrawn, including any taxes that were withheld, will need to be redeposited in order to avoid taxation. This may require you to deposit funds into your IRA from another account. For example, if you took a $50,000 RMD and had 40 percent ($20,000) withheld for taxes, you would need to make up that $20,000 from your taxable account in order to return the full $50,000 and avoid paying taxes on the full amount. The $20,000 withheld for taxes would then be treated as taxes paid and possibly refunded when you file your 2020 taxes.
- COVID-19 hardship rules: The new CARES Act expands the hardship withdrawal provisions to cover COVID-19-related hardships and provides repayment options. If you, your spouse, or a dependent have been diagnosed with COVID-19, or experienced adverse financial consequences as a result of the disease, such as loss of job, reduced hours, lack of childcare, closed or reduced business operations, you may be able to treat your earlier distribution as a hardship withdrawal. In this case, you would have up to three years to recontribute the amount to your retirement account.
Qualified charitable distributions (QCDs) are still allowed. For those over age 70½, distributions of up to $100,000 directly to charity are still possible, but other charitable giving strategies will likely be more tax advantageous for 2020. When a distribution from a traditional IRA to charity is replacing a distribution to the IRA owner, the strategy reduces taxable income and is generally escaping ordinary income tax rates. However, with no RMD required, the IRA owner is no longer avoiding taxable income, but will still not receive a deduction for the charitable gift on their income tax returns. It may be more advisable to contribute either cash or appreciated securities depending on overall financial circumstances.

Evaluate Roth Conversions+

Converting your pre-tax retirement funds into a Roth account will trigger tax now, but allow you to withdraw the funds tax-free in the future.
Converting when values are relatively low will trigger less taxation and may be a smart move if you are not using funds from the IRA to pay the taxes. This requires careful evaluation.
With the SECURE Act limiting most inherited IRA distribution periods to 10 years, Roth IRAs are becoming even more attractive for transferring wealth.
Electing to convert small portions of your IRA to a Roth IRA over many years may be a useful strategy for creating your own “stretch” IRA.
For those who will be subject to estate tax ($11.58 million at the federal level, varies by state for state estate taxes), Roth conversions prior to death will reduce estate taxes.
Federal income tax rates are quite low by historical standards. By paying now, you remove the uncertainty of higher income tax rates in the future.
Beware, it generally is not advantageous to convert to a Roth IRA if you need to withdraw funds from the IRA to pay the taxes.

Consider Tax-Loss Harvesting+

Swapping out less desirable names or diversifying concentrated positions with low cost basis when values are low may be a smart strategy to achieve your longer term goals with lower tax cost.
Losses in your portfolio may help shelter tax gains and allow you to improve the overall position of your portfolio.
Ferguson Wellman and West Bearing are evaluating opportunities and taking appropriate actions for assets we manage. We encourage you to consider the same for any assets not managed by our team.

Optimize Charitable Impact and Tax Deductions+

Supporting philanthropic organizations is not only beneficial for our communities, it often reduces our income tax liability.
The CARES Act offers several opportunities to increase the tax benefits of your charitable giving in 2020. The following two advantages apply only to cash contributions and exclude contributions made to donor advised funds (DAFs) or supporting organizations. Temporary benefits include:

Tax filers are allowed an “above-the-line” deduction for qualified charitable contributions of up to $300.
Qualified contributions may be deducted against 100 percent of adjusted gross income (AGI), rather than the previous limit of 60 percent for cash gifts. Deductions for gifts of appreciated assets remains capped at 30 percent of AGI.

Pause and evaluate any planned qualified charitable distributions (QCDs) from your IRA. While often a tax-savvy strategy, the IRS waiver of RMDs for 2020 likely means another approach will be more effective this year.
Bundling your charitable gifts, or making large gifts every two-to-three years may still make sense. But remember, the temporary higher deductions only apply to cash gifts and exclude donor advised funds.
Don’t gift assets that have declined in value below their original purchase price. If you have assets that have declined in value below their original purchase price and want to benefit a charitable organization, sell the securities first and gift the proceeds to charity. This will allow you to capture the tax loss and possibly benefit from a higher tax deduction.

Leverage Low Interest Rates  +

Make sure all your debt is structured to take advantage of low interest rates. This may be as simple as refinancing your existing mortgage or a more significant restructuring of debt to use options with low interest rates and possible tax advantages.
Reviewing your debt options is especially important if you are close to retirement as the lack of a salary will likely affect your future borrowing options.
Interest on home acquisition debt is generally tax deductible on loans up to $750,000. If you acquired your home prior to December 31, 2018, you may be grandfathered with the ability to deduct interest on up to $1 million of debt.
Debt secured by your investment portfolio may offer an inexpensive, simple and tax advantaged source of funds, if you have sufficient reserves to avoid margin calls or portfolio liquidations.
This may be a good time to buy a larger home, change homes or downsize if you plan to carry debt and you have the resources.

Accelerate Family Gifting Strategies   +

While this may be a hard time to think about gifting, it will likely prove a very smart time for those with significant estates who will be subject to estate tax at the federal or state level.
Gifting assets when fair market values are relatively lower will reduce the gift tax that will be paid, or the amount of the lifetime exemption that will be used, thus reducing future estate taxes.
Lifetime gifting of assets other than cash requires careful evaluation of the pros and cons and should be considered in careful consultation with your tax, legal and financial advisors.
If you are considering significant charitable and family gifts, perhaps over $1 million, you may want to explore several types of trusts that are particularly effective with low interest rates. Examples include intentionally defective grantor trusts, charitable lead trusts and qualified personal residence trusts.

Revisit Your Monthly Budget and Spending+

If your income or savings has decreased, or if you were planning to withdraw funds from your portfolio in the near term, it is a good idea to revisit your budget.
Limiting withdrawals during periods of market declines will allow your dollars to go much farther when growth continues.

Purchase a Home if You Are Ready to Buy +

If you have a secure job, sufficient down payment and can maintain your rainy-day fund, this low interest environment may be a good time to step into a home purchase.
It will be important to evaluate with your realtor the potential impact of the COVID-19 pandemic on home prices in your area. While the Fed has suspended evictions and foreclosures on loans guaranteed by the Federal Housing Administration and ordered similar relief from Fannie Mae and Freddie Mac, individuals who face financial hardship may be looking to sell quickly, prior to foreclosure.
Appraisals are partially based on recently closed transactions. As a result, values tend to be slightly high during a declining market and slightly low during periods of market appreciation

Later: It’s always the right time…

Maintain the Right Asset Allocation +

Your allocation to stocks, bonds and other assets will be the primary driver of your long-term performance and the amount of market volatility you experience.
Proper allocation should be evaluated by reviewing your balance sheet and cash flow. This analysis should include a review of your assets, liabilities, income, expenses as well large purchases, expected business sales, inheritances and other items.
In addition, any asset allocation decision needs to pass the “sleep at night” test. In other words, are you going to be comfortable with the amount of volatility and not want to sell when the market is down?
Don’t try to time the market. When things seem out of whack, it is easy to let fear drive you to sell stocks or greed cause you to make risky investments. Have a disciplined strategy and allow your advisor to help you evaluate opportunities without risking your long-term success.

Know Your Spending Capacity +

Understand the lifestyle that your portfolio and other income can support. There are many tools available and your advisor can help you evaluate the impact a large purchase, philanthropic gift, inheritance or delayed retirement may have on your future resources.
Overspending early in retirement and during market declines is costly. 
Underspending also has costs in terms of lifestyle, family gifting and philanthropic impact.

Maintain a Rainy-Day Fund+

It is generally advisable to maintain at least 3-6 months of living expenses in a cash reserve. Times like these remind us of the importance of this financial rule-of-thumb.
Ensure your savings keeps pace with any increases in your expenses.
Having liquid funds available for emergencies and planning for expected distributions preserves capital by avoiding rush sales in down markets.

Organize Financial, Healthcare and Estate Planning Documents +

Get your files organized so that you and your family feel empowered with regard to your finances.
Establish a designated and secure location so important documents are available when needed.
Review your estate plan including your will and/or your revocable living trust for consistency with your goals. If you have more than $1 million, ask your attorney if your tax planning is still appropriate.
Verify account titling or ownership. For example, if you have a revocable living trust, most of your assets should probably be owned by the trust. Note, retirement accounts are distributed according to beneficiary designations and these should be reviewed also. 
Confirm beneficiary designations on retirement accounts, life insurance and annuities to make sure they are up-to-date .
Ensure your advanced healthcare directive, and POLST if applicable, reflect your current wishes and have been distributed to your designated healthcare representative(s) and medical teams.
If you have children who are reaching the age of majority, make sure they also have proper planning, especially an advanced healthcare directive.

Plan and Invest for Retirement +

Start or keep investing for retirement, either through an employer plan, such as a 401(k), a personal individual retirement account (IRA) or an after-tax investment portfolio. Keep your focus on the long term.
Use employer-sponsored savings plans, such as a 401(k), especially if they offer any matching of employee contributions.
If you haven’t already, there is no time like the present to develop a specific and solid retirement savings plan. Your plans should include a specific savings amount, account type and investment strategy.
Planning early will help you save sufficient resources to support your desired retirement lifestyle.

Full retirement age for Social Security is now age 67 and benefits increase with each year you delay up to age 70. Be intentional about your and your spouse’s personal withdrawal strategies.
If you are not receiving Social Security at age 65, you will not be automatically enrolled in Medicare. There are costly penalties for not enrolling in a timely fashion.
Licensed Medicare specialists are available at no cost to the insured to help evaluate various plans and coverage options. This is true of initial elections as well as each year during open enrollment.
See additional information about healthcare in retirement here.

Fund and Invest in 529 College Savings Plans +

Start or continue saving for your children’s, grandchildren’s or other’s education. The longer the funds are invested, the greater the benefit of tax-free compounded growth. Investing when markets are lower may also be a smart move.
529 funds provide a triple-tax advantage. Investments in 529 accounts grow tax-free and the funds may also be withdrawn tax-free if they are used for qualified education expenses. Additionally, many states, including Oregon and Idaho, offer a tax deduction when you fund.
529 accounts offer a unique opportunity for gifting as the IRS allows individuals to fund accounts with up to five years of the annual gift tax exemption without paying transfer taxes. For example, each grandparent could contribute $75,000 (five years x $15,000 annual exemption).
Useful information is available at www.savingforcollege.com
The SECURE Act, which became effective on January 1, 2020, enables individuals to withdraw up to $10,000 from existing 529 accounts to pay down student debt for themselves and/or siblings

Plan for Future Healthcare Expenses with a Health Savings Account (HSA) +

Similar to 529 accounts, HSAs are triple-tax advantaged as they offer:

Tax deduction on funding,
Tax-free growth, and
Tax-fee withdrawals if used for qualified medical expenses.

HSAs may be established by individuals covered by a high-deductible health insurance plan.
If possible, rather than spending the money on current healthcare expense, let them grow tax free. Unlike pre-tax retirement accounts, these funds will not be subject to income tax when withdrawn.

Ferguson Wellman and West Bearing do not provide legal, tax or medical advice. This material has been prepared for general educational and informational purposes only and not as a substitute for qualified counsel. You should consult qualified professionals to understand how this information may, or may not, apply specifically to you.