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What year end financial moves can I make in a pandemic?

Staying on top of your finances is important. It’s not something that you need to monitor daily (unless you do so for budgetary reasons), but there are certain times each year that are important to check in. One of those times is the year end.

The year end presents some challenges and opportunities that may be available other times during the year, but become more important as time is running out to make decisions for the calendar year. You also will have more information about where your household taxable income will be and future expectations about what it will be as well as more global factors, like tax rates and economic expectations. The year end coordinates with our financial lives probably more than any other time each year. That’s not to say you won’t have significant financial events throughout the year, it just means that each year there are things we should keep in mind in case you want to take advantage.

So, I’ll mention three financial items you should tend to this holiday season. First, open enrollment. Second, year end tax moves. And third, this year has presented some unique opportunities with COVID-19 and the CARES Act, are there any opportunities for you there?

Let’s do it.

First, open enrollment.

You may not think of open enrollment as a financial decision making time, but it really is. If you get benefits through your employer, it presents a huge opportunity. That means, the more benefits your employer offers, the more importance this has for you and vice versa. If your employer offers no benefits, you can skip this.

What to do? The first thing is to review all options available. If you work for a large company or public agency (state, federal, university, school, hospital) you probably have a lot of benefits available to you. Health Insurance, Life Insurance, Disability Insurance, retirement plan with match, legal insurance, or any other benefits.

I wrote a full blog talking about this, check it out here for more information.

Second, year end tax moves.

There are a lot of year end tax moves you can make. This year presents a unique opportunity for a lot of families because their income may have been upset due to the pandemic. Typical year end moves could include tax loss harvesting or retirement plan savings. If your income was disrupted and will be lower because of that, more in depth strategies could be utilized.

For example, converting some of your Traditional IRA to a Roth IRA, increasing Roth savings in your employer provided retirement plan versus Traditional, or redirecting savings from a retirement account to a non qualified (aka non retirement or an account that’s not tax favored).

There are a lot of strategies here, but the basic premise to consider is has your income changed for this year. Then, if it’s reduced from previous years and what’s expected for future years, does it make sense to increase your tax burden this year to what a “normal” year would be? The strategy is if your income is down, you could do something to increase income to pay a lower or similar tax rate by increasing your after tax or tax free savings.

I’m going to make up an example to try and illustrate how you can use this. Let’s say in a normal year, your gross household income is $105,000 and your effective federal tax rate is 12%. This year, you expect your household income to be $55,000 and expected effective tax rate to be 10%. You could convert $50,000 of a Traditional IRA to your Roth IRA, which will increase your taxable income to $105,000 and require you to pay 12% federal income tax on the conversion. Again, these are made up numbers, but hypothetically, let’s say that’s compared to in a normal year, your marginal tax rate would be 22% if you increased your income.

Lastly, are there specific strategies to the pandemic or CARES act that you can use.

This blurs some into the previous point, but the CARES act made a lot of allowances for those who were affected by the pandemic.

This situation will probably be most helpful to you and apply if you suffered a significant financial loss or need a large cash infusion for some reason. If you were negatively impacted and took high interest credit card debt, have student loans, or other high interest debt, you could consider taking an early distribution from a retirement account to eliminate or reduce one of these debts.

The strategy here is taking some from your savings to reduce monthly expenses. It’s not a clear cut slam dunk, because you would be reducing your retirement savings. The benefit is you don’t have to pay a penalty, so if this was something you were considering, it could be a good time to make the move. Reducing debt can be a good move if it allows you to have more comfortable cash flow due to not having as much of a debt payment due or if it’s holding you back from other goals. This is really an individual decision, but it’s something that, if appropriate, you’d want to do prior to year end. As always, I recommend you consult your financial professional prior to making any complicated investment decisions.

Conclusion

The end of the year always presents investment opportunities. As with all financial planning decisions, the better the plan, the easier it is to make these decision when opportunities arise.  This year, there may be a few more items to consider due to the pandemic, CARES Act, and recessionary environment we are in. I recommend you talk to a financial advisor or research what is best for you, based on your goals and financial plan, but knowing the options is a great first step.

If you’d like to discuss your financial situation or create a financial plan, Telos Financial would be glad to discuss a possible relationship with you. Contact us today to schedule an introductory meeting. Telos is a fee based, holistic financial planning firm serving Michigan’s high income and high net worth professionals, millennials, recent college graduates, and small business owners.

Thanks for reading the latest edition of Planning for your Purpose, Telos Financial’s blog, where I discuss different topics related to financial planning. CERTIFIED FINANCIAL PLANNER™ professional Dennis LaVoy is Plymouth, Michigan’s holistic financial advisor serving clients throughout the mitten as well as across the country.

The primary purpose of the blog is to introduce financial planning concepts and questions I receive from clients that I believe are important. I want to start discussions that will educate, benefit, and improve your financial life, ultimately, to help you focus on your telos!

Telos Financial is located in Plymouth, Michigan and focuses on serving young professionals and their families. Dennis LaVoy is a Certified Financial Planner™ (CFP®) Designee and a Chartered Life Underwriter®. Dennis founded Telos Financial and to provide fiduciary financial services to families across Michigan including Plymouth, Canton, Ann Arbor, Detroit, and as well as all over the great United States of America.