By Brian D’Orazio, Principal CliftonLarsonAllen Wealth Advisors, LLC – Email T. 303.265.7890
- The COVID-19 pandemic has brought financial uncertainty
- Gaining clarity on your current financial situation can help you make informed decisions and help you gain peace of mind.
Managing your financial well-being can be just as important as maintaining your physical health.
We’ve seen an unprecedented array of stimulus programs, changes to tax law, and other incentives to help stimulate the economy. It is a challenge to watch or read any daily news without seeing a new perspective on the “shape of the recovery” with economists, money managers, and the like sharing their opinion.
In addition, many of us have been practicing social distancing and honoring stay at home orders. It is normal to feel fearful or anxious as the world around us changes so quickly.
With so much noise around us, a natural question may be, what should or can I do? Our advice is to focus on the things that you can control. Here are some items to consider:
1. Get a “second opinion” investment review
In medicine, it is common to get a second opinion in the case of a life-threatening emergency. As an investor, you, too, can often benefit from a second opinion. Regardless of what our economic recovery looks like, you’ll be in a better position to understand your options when you take the time to understand your current holdings. Think through questions such as why you own what you own, how much risk you are assuming, and whether you are positioned for what may lie ahead.
It is nearly impossible to predict how the market may perform in the short run. In the long run, we believe history shows us that higher quality, lower leveraged, and dividend paying stocks could add value. Global, large cap companies also seem likely to outperform small cap companies. While these are important pieces to the overall puzzle, a personalized financial plan is paramount to any sound investment strategy. Consider sharing your personal financial goals, time horizon, and liquidity needs with a wealth advisor so that an allocation can be personalized for you with those important topics in mind.
2. Update your will and estate plan, review your insurance
Preparing the proper will, estate plan, and medical directives now can help you be confident that your loved ones are cared for and allow for distribution of assets in the manner you desire.
Individuals or families with taxable estates should consider gifting assets to beneficiaries now. Because asset values may be lower during this economic downturn, gifting now could yield significant estate tax savings. Speaking with a financial professional can help you determine if this is right for you and your estate.
As many individuals, households, and businesses look to reduce cash outflows, some are considering eliminating life insurance premiums. Prior to doing so, you should consider the original purpose of the insurance and whether you have had any major life or health events since you last reviewed your policy. Revisiting your goals and understanding your options can help you make an informed decision. Explore other ways to reduce cash outflow — reduce or cease premiums, reduce death benefit, or potentially sell the policy to a third party — before walking away or cashing in a policy that could potentially trigger a tax event.
3. Take advantage of tax opportunities
Support the charities you cherish while receiving a tax break. The CARES Act allows individuals who do not itemize deductions to take an “above-the-line” deduction for qualified charitable contributions up to $300. For those who itemize deductions, you may deduct cash charitable gifts up to 100% of your adjusted gross income. Finally, corporations are now able to deduct charitable gifts up to 25% of their taxable income.
With asset values lower than they have been in years, now may be the ideal time to consider a Roth conversion. A Roth conversion allows you to convert pre-tax dollars to potentially tax-free dollars. Converting while asset values are depressed may allow for the growth or asset recovery to occur in a more tax efficient manner as money transfers from pre-tax taxable IRA assets to Roth IRA assets, where future withdrawals are tax free. The amount converted is taxed in the current year, which could be an advantage if your income will be lower this year due to the coronavirus.
This year, we have experienced some of the largest fluctuations in the market ever, both positive and negative. Appreciation that may have taken months or years to accumulate was literally wiped away in days. Given this market volatility, we believe that you should consider reviewing your individual holdings for tax loss harvesting opportunities. You could consider liquidating positions that may have unrealized losses, as those losses could be utilized to offset future gains and/or up to $3,000 of ordinary income per year. If there are no gains to apply these losses, don’t worry, you may be able to carry them forward to a future tax year. If you are considering this strategy, be mindful of “wash sale rules.” When a security is sold at a loss and the same or substantially identical security is repurchased within 30 days, it could disallow the capital loss.
As there are many variables to consider with all these strategies, it is best to discuss this with your tax and financial professional prior to taking any action so that a personalized plan can be created with your needs and goals in mind.