Planning Opportunities During Volatility

Michelle R. Santiago Michelle R. Santiago, Esq., CFP®

Over the last few weeks, we have kept you updated on the Coronavirus/COVID-19 outbreak, the corresponding market volatility, and our response from the portfolio management perspective. This note is to share what we’re seeing through a financial planning lens.

In the short term, we know that this is a very difficult time, and that you are likely feeling anxious on many levels. We also know that you are trusting us to remain composed and to advise you based on our experience, research, and analysis; not emotion, speculation, or the 24-hour news cycle. Through the Panics of 1873 and 1893, the Spanish Flu of 1917-18, the crash of 1929 and ensuing Great Depression, and more recently, the dot-com bubble, 9/11, and the 2008 recession, this level-headed approach is what has made HM Payson a trusted safe haven.
Your financial success still depends on the disciplined execution of a well-reasoned plan. And this month’s extreme equity action has presented some unique planning opportunities that may be worth discussing with your financial advisor and accountant.
Before making any changes to your plan, your advisor will want to ensure that you:

1. Have an emergency cash reserve that covers six to nine months of living expenses
2. Have three to five years of spending allocated to cash or fixed income as part of your overall portfolio asset allocation
3. Will not need the funds you’ll be investing for three or more years (so that they have time to grow).

Provided those liquidity conditions are met, we see potential value in exploring the following opportunities:

Roth Conversions

With equity market values depressed from the recent tumult, it may make sense to convert all or a portion of your traditional IRA (pre-tax dollars) to a Roth IRA (post-tax dollars). The recent passage of the CARES Act makes this strategy even more attractive. For those subject to the required minimum distribution rules, you normally must withdraw your RMD before you convert any funds to a Roth IRA. The CARES Act eliminates the requirement to take RMDs for 2020, allowing you to initiate the conversion without first having to withdraw your RMD. There are many factors to consider before proceeding with this and your accountant should be involved in this decision to help you weigh the tax consequences. Some of those factors include:

How the conversion will impact your tax bracket (amount converted is treated as ordinary income and may push you into a higher bracket)

Whether your increased income from the conversion will impact your income-related healthcare costs (e.g. Medicare premiums and health insurance costs under the Marketplace)

How you will pay taxes resulting from the conversion (best to use funds outside of the IRA for maximum growth)

With those considerations in mind, the benefits of a conversion include:

Longer tax-free growth – Since there are no required minimum distributions (RMDs) from a Roth IRA, your account can grow tax-free for a longer period of time.

Tax-free withdrawals – Withdrawals from a Roth IRA are not subject to income tax, and this is true for your beneficiaries are well. Although your beneficiaries will be required to take distributions from their inherited Roth IRA, and now with the SECURE Act, they must take their distributions out over a 10-year period (with some minor exceptions), their distributions will still be tax-free.

Family Gifting

With lower market values, now may be a good time to consider making gifts of stock or front-loading cash gifts to 529 accounts.

Stock Gifts – Because the value of the stock is lower, you can give more shares away, allowing you to leverage the transfer of wealth to the next generation.

529 Contributions – You may contribute up to five years’ worth of annual exclusions gifts ($75,000 per donor per child), provided you do not make additional contributions over the next five years. Front-loading your contributions gets the funds invested into the 529 account sooner and while the market is low.

Pre-Retirement Allocation Rebalancing

With this decline in the market, pre-retirees should review their retirement accounts and consider rebalancing their target equity allocation. As the value of stocks in your retirement account have likely decreased while bonds remained stable, your overall equity allocation is likely reduced. An adjustment will bring you back to your target.

If your retirement is many years away, you might even consider increasing your overall retirement account’s equity allocation, following an asset-liability framework that considers your Required Minimum Distribution start date. Under the new SECURE Act, anyone born after July 1, 1949 does not have to take RMDs until age 72. With an asset-liability matching framework, any funds needed within two years should be invested in cash and short-term bonds, while funds needed within three to five years should be invested in intermediate-term bonds. For any funds not needed for five or more years, the investment objective should be growth, with an emphasis on stocks.

We are committed to guiding our clients through these trying economic and social times. As always, we welcome the opportunity to discuss these options as well as any other issues or concerns you might have.


Your HM Payson Team

This newsletter is intended for educational purposes only. For financial planning advice specific to your needs or for further information, please consult your portfolio manager.

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