COVID-19 & Your Finances: Frequently Asked Questions

Here is a broad summary of the recent legislation and tax relief, but one of the biggest changes is the IRS pushing back Tax Day. Your 2019 tax filings, tax payments, gift tax returns, 2019 retirement account contributions, and Q1 estimated income tax payments are now due July 15, 2020. This gives you time to account and save for any taxes you may owe. For taxpayers who are granted an extended return, this date remains October 15, 2020. Q2 estimated income tax payment is still due on June 15. Please note that state rules can differ.

There are numerous opportunities you can take advantage of in the current market, which we explain in greater detail in full in this blog post. Low asset prices combined with low-interest rates means historically low mortgage rates. Refinancing your mortgage may be a worthwhile conversation to have with your lender, as it could save you money on a monthly basis. Additionally, inter-family lending interest rates have dropped, so now is a smart time to consider helping a family member with a loan. And, of course, buying into the market at a lower prices has the potential to improve your ability to reach your long-term goals. 

We never know when or why a downturn will occur, but our financial plans build in downturns occurring with a similar magnitude and frequency as they have in the past. By planning on downturns like the one we are in now, we can build an investment plan that doesn't require us to make changes in response to market volatility. While we don't believe you should be deviating from a carefully crafted investment plan, rebalancing and tax loss harvesting are ways to make the most out of this situation with your portfolio. Rebalancing is most effective when you do it systematically, either through a regular schedule or based on a tolerance band (a predetermined threshold of when to rebalance). Tax loss harvesting allows us to use capital losses in your taxable investments to offset future capital gains and a portion of your ordinary income. For more on those strategies, see this blog post.

The CARES Act is an Economic Relief Plan featuring a series of policies to help anyone who has been affected by COVID-19. This legislation has waived the requirement of a minimum distribution from your retirement account for 2020, creating an opportunity for a Roth Conversion that would allow you to move assets that would have otherwise been distributed to your IRA. Those impacted by COVID-19 can take a distribution from an IRA of up to $100,000 and elect to pay taxes on it over the course of three years. If you’ve already taken a distribution of this amount for 2020 within the last 60 days, you will still be able to roll the contribution back over to your IRA, where it will not be taxed. If you’ve exceeded 60 days, you can pay it back over the course of three years, as mentioned, and avoid income tax.

If your portfolio is in a place where you can contribute your appreciated assets to charity, that might be your best option. Neither the charity nor you will be taxed from these assets, as capital gain is built-in. Another option is to make a cash contribution, if your cash-flow is healthy, so you can offset your income tax this year.

Depending on your situation, waiting for recovery makes sense. The CARES Act offers additional cash flow to make contributions to offset income.

There are a few factors to consider here: 1) your working status (i.e., if you’re retired or not) and 2) how much cash you have on standby. If you’re still employed with at least a six months salary on hand to cover your basic expenses, making a long term investment in something like a 529 account or Roth IRA can make sense. If you’re retired, we’d suggest 18-24 months cash on hand before making an investment. If you can invest a lump sum, you may experience better returns.

A bear market is when a market declines 20% from it's peak. Generally bear markets are categorized as structural, cyclical, or event-driven. We'd say this bear market falls into the event-driven category, which has an average downturn of about 30% and has historically taken about 13 months to recover.

No one knows for sure. The only thing we can count on is the crisis eventually ending. For more on why it pays to be an optimist in this situation, see this recent blog post from our Co-Chief Investment Officer.