Year-End Planning Checklist

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2020 has been a strange year for all of us, and although some financial planning deadlines have been modified due to the CARES Act, most 12/31 deadlines remain in place.  Below are items we are considering as we wrap up the year with our clients.  Should you have questions about whether or how any of the items below apply to you, please reach out to us as we will be happy to assist.  

 2020 Year-End Planning Items with 12/31 Deadline

  1. Maxing out 401(k) contributions:  Employees can contribute up to $19,500 (plus $6,500 extra for those over 50), into their 401(k)s for 2020.   If you have not yet contributed the maximum amount and your cash flow allows, consider increasing your contributions now to reach the maximum contribution amount prior to year end.  
  1. 401(k) Matching:  If your company offers a 401(k) match, it makes sense to take advantage of the full match opportunity every year.  If you have not received the full match for 2020, let us review your company’s 401(k) plan rules to determine if you can contribute enough to receive the full 2020 match before year end.  
  1. Charitable Giving for 2020:  There are some additional charitable deductions this year as part of the CARES Act.  There is a $300 deduction for taxpayers who don’t itemize, and for clients interested in large donations, taxpayers can deduct up to 100% of their adjusted gross income (up from 60%) for cash donations made to public charities. For clients with taxable accounts, we frequently recommend donating appreciated securities instead of cash via a donor-advised fund (DAF).  This strategy works well when a taxpayer has highly appreciated securities in taxable accounts, and/or in a year when income is higher allowing a client to benefit from a larger charitable deduction.  
  1. Gifting:  The annual gift exclusion amount for 2020 is $15,000 per taxpayer to each recipient.  (Married couples can give $30k.)  Make your annual gifts prior to 12/31 if you haven’t already!  
  1. Tax Loss/Gain Harvesting:  At Warren Street, we employ a continuous monitoring of client accounts for tax loss harvesting opportunities.  Similarly, if a client is experiencing a particularly low tax year, it may be the right time to strategically harvest capital gains.  
  1. Roth Conversions:  Although market downturns are not fun, they can certainly provide an opportunity for strategic Roth Conversions.  This is an annual planning item that we analyze for every Warren Street client.  
  1. LLC / Entity Formation:  If you are in the process of business entity formation for 2020, you may need to have your documents signed and filed prior to the end of the calendar year.  

If you have any questions about the above checklist or any other year-end planning questions, please feel free to reach out to your trusted wealth advisor. We are here to help!

Emily Balmages, CFP®, CRTP

Wealth Advisor, Warren Street Wealth Advisors

Investment Advisor Representative, Warren Street Wealth Advisors, LLC., a Registered Investment Advisor

The information presented here represents opinions and is not meant as personal or actionable advice to any individual, corporation, or other entity. Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional. Nothing in this document is a solicitation to buy or sell any securities, or an attempt to furnish personal investment advice. Warren Street Wealth Advisors may own securities referenced in this document. Due to the static nature of content, securities held may change over time and current trades may be contrary to outdated publications. Form ADV available upon request 714-876-6200.

What to Expect For Expense Deductions if You’ve Taken a Paycheck Protection Program Loan

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Earlier in 2020 the “Paycheck Protection Program” was passed, which allowed for much needed aid for struggling small businesses during the Coronavirus pandemic. One of the main features of the Paycheck Protection Program was the ability to potentially have your loan amount forgiven, tax free. 

While this is a great benefit, one of the many grey areas that arose was whether or not expenses that were paid by the business using PPP funds were eligible for a tax deduction. While the funds may have been spent on business related items that would normally be tax deductible, it was unclear whether this same treatment would be available for those who received tax free PPP loan forgiveness.

On November 18th, 2020 the IRS and Treasury Department Secretary Steven Mnuchin issued some additional guidance to assist in clearing up some of the confusion. The statement issued expressed that “since businesses are not taxed on the proceeds of a forgiven PPP loan, the expenses are not deductible. This results in neither a tax benefit nor tax harm since the taxpayer has not paid anything out of pocket.” It then went on to state that “if a business reasonably believes that a PPP loan will be forgiven in the future, expenses related to the loan are not deductible, whether the business has filed for forgiveness or not.”  Therefore, they encouraged businesses to file for forgiveness as soon as possible. In the case where a PPP loan was expected to be forgiven, and it is not, the statement outlined that businesses will be able to deduct those expenses.

As you can imagine, this was not the desired outcome for many business owners. Currently there is a fight within Congress, the Treasury Department, as well as in the business and tax communities regarding this interpretation of the PPP language. Many in Congress from both sides of the aisle argue that this interpretation of the language in the Bill does not align with Congressional intent. For example, Senate Finance Committee Chairman Chuck Grassley (R-Iowa) and Ranking Member Ron Wyden (D-Ore.) released a joint statement expressing their opinion that the expenses should be considered deductible. With Congress currently negotiating both a spending bill and second stimulus package, many hope the rules around deductibility of these expenses will be specifically outlined soon.

If you are a business owner impacted by this, unfortunately the best course of action is to remain patient with hopes of some additional Congressional action coming shortly. As always with Congress, it is unclear when they will act and what will be in the final version of the Bill. Ideally, this will be addressed prior to Congress’ holiday adjournment on December 18th, 2020. For the time being we are forced to assume that these expenses will not be deductible until additional Congressional action says otherwise. As always, when it comes to anything tax-related, your best course of action is always to work directly with your CPA and tax professional.

Source – https://home.treasury.gov/news/press-releases/sm1187

Source – https://www.jdsupra.com/legalnews/the-irs-forgiven-ppp-loans-and-business-88352/#_edn25

Source- https://www.finance.senate.gov/chairmans-news/grassley-wyden-treasury-misses-the-mark-on-ppp-loan-expense-deductibility-guidance

Justin Rucci, CFP®

Wealth Advisor, Warren Street Wealth Advisors

Investment Advisor Representative, Warren Street Wealth Advisors, LLC., a Registered Investment Advisor

The information presented here represents opinions and is not meant as personal or actionable advice to any individual, corporation, or other entity. Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional. Nothing in this document is a solicitation to buy or sell any securities, or an attempt to furnish personal investment advice. Warren Street Wealth Advisors may own securities referenced in this document. Due to the static nature of content, securities held may change over time and current trades may be contrary to outdated publications. Form ADV available upon request 714-876-6200.

Eight “Best/Worst” Wealth Strategies During the Coronavirus

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“The utility of living consists not in the length of days, but in the use of time.”

-Michel de Montaigne

For better or worse, many of us have had more time than usual to engage in new or different pursuits in 2020. Even if you’re as busy as ever, you may well be revisiting routines you have long taken for granted. Let’s cover eight of the most and least effective ways to spend your time shoring up your financial well-being in the time of the coronavirus. 

1. A Best Practice: Stay the Course 

Your best investment habits remain the same ones we’ve been advising all along. We build a low-cost, globally diversified investment portfolio with the money you’ve got earmarked for future spending. We structure it to represent your best shot at achieving your financial goals by maintaining an appropriate balance between risks and expected returns. We stick with it, in good times and bad.

2. A Top Time-Waster: Market-Timing and Stock-Picking

Why have stock markets been ratcheting upward during socioeconomic turmoil? Market theory provides several rational explanations. Mostly, market prices continuously reset according to “What’s next?” expectations, while the economy is all about “What’s now?” realities. If you’re trying to keep up with the market’s manic moves … stop. It is not a good use of your time.

3. A Best Practice: Revisit Your Rainy-Day Fund

How is your rainy-day fund doing? Right now, you may be realizing how helpful it’s been to have one, and/or how unnerving it is to not have enough. Use this top-of-mind time to establish a disciplined process for replenishing or adding to your rainy-day fund. Set up an “auto-payment” to yourself, such as a monthly direct deposit from your paycheck into your cash reserves. 

4. A Top Time-Waster: Stretching for Yield 

Instead of focusing on establishing adequate cash reserves, some investors try to shift their “safety net” positions to holdings that promise higher yields for similar levels of risk. Unfortunately, this strategy ignores the overwhelming evidence that risk and expected return are closely related. Stretching for extra yield out of your stable holdings inevitably renders them riskier than intended for their role. As personal finance columnist Jason Zweig observes in a recent exposé about one such yield-stretching fund, “Whenever you hear an investment pitch that talks up returns and downplays risks, just say no.”

5. A Best Practice: Evidence-Based Portfolio Management

When it comes to investing, we suggest reserving your energy for harnessing the evidence-based strategies most likely to deliver the returns you seek, while minimizing the risks involved. This is why we create a mix of stock and bond asset classes that makes sense for you; we periodically rebalance your prescribed mix (or “asset allocation”) to keep it on target; and/or we adjust your allocations as your goals change. We also ensure that we structure your portfolio for tax efficiency, and choose the ideal holdings for achieving all of the above. 

6. A Top Time-Waster: Playing the Market 

Some individuals have instead been pursuing “get rich quick” schemes with active bets and speculative ventures. The Wall Street Journal has reported on young, do-it-yourself investors exhibiting increased interest in opportunistic day-trading, and alternatives such as stock options and volatility markets. Evidence suggests you’re better off patiently participating in efficient markets as described above, rather than trying to “beat” them through risky, concentrated bets. Over time, playing the market is expected to be a losing strategy for the core of your wealth. 

7. A Best Practice: Plenty of Personalized Financial Planning

There is never a bad time to tend to your personal wealth, but it can be especially important – and comforting – when life has thrown you for a loop. Focus on strengthening your own financial well-being rather than fixating on the greater uncontrollable world around us. To name a few possibilities, we’ve continued to proactively assist clients this year with their portfolio management, retirement planning, tax-planning, stock options, business successions, estate plans and beneficiary designations, insurance coverage, college savings plans, and more. 

8. A Top Time-Waster: Fleeing the Market

On the flip side of younger investors “playing” the market, retirees may be tempted to abandon it altogether. This move carries its own risks. If you’ve planned to augment your retirement income with inflation-busting market returns, the best way to expect to earn them is to stick to your plan. What about getting out until the coast seems clear? Unfortunately, many of the market’s best returns come when we’re least expecting them. This year’s strong rallies amidst gloomy economic news illustrates the point well. Plus, selling stock positions early in retirement adds an extra sequence risk drag on your future expected returns. 

Could you use even more insights on how to effectively invest any extra time you may have these days? Please reach out to us any time. We’d be delighted to suggest additional best financial practices tailored to your particular circumstances. 

—

Justin D. Rucci, CFP®

Wealth Advisor, Warren Street Wealth Advisors

Investment Advisor Representative, Warren Street Wealth Advisors, LLC., a Registered Investment Advisor

The information presented here represents opinions and is not meant as personal or actionable advice to any individual, corporation, or other entity. Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional. Nothing in this document is a solicitation to buy or sell any securities, or an attempt to furnish personal investment advice. Warren Street Wealth Advisors may own securities referenced in this document. Due to the static nature of content, securities held may change over time and current trades may be contrary to outdated publications. Form ADV available upon request 714-876-6200.

PPP Flex Act

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There was some good news for our small business owners as the Paycheck Protection Program Flexibility Act of 2020 was signed into law today (aka PPP Flex Act).  The PPP Flex Act amends certain provisions of the CARES Act relating to PPP loans.  You can view the full text here:  Text – H.R.7010 – 116th Congress (2019-2020): Paycheck Protection Program Flexibility Act of 2020

Highlights include: 

1. Minimum PPP loan maturity of 5 years, and an allowance that lenders and borrowers can mutually agree to modify loan terms. 

2. Borrowers now have until the earlier of 24 weeks after loan origination or 12/31/20 to spend potentially forgivable loan proceeds (the original deadline was 8 weeks after loan origination).  

3. Borrowers may qualify for loan forgiveness without regard to reduction in full-time employees if they can document:   inability to hire or rehire employees OR inability to return to normal business activities due to HHS, CDC, or OSHA guidance or requirements.  

4. To qualify for forgiveness, 60% of loan proceeds must be used for payroll costs (the original requirement was 75%).  This means that up to 40% of the forgivable loan proceeds can be used for mortgage payments, rent, or utilities.  

5. Small businesses that receive PPP loan forgiveness can also now defer the Employer portion of Social Security taxes from 3/27/20 through 12/31/20.  

6. Notably, the PPP Flex Act did not fix the issue of expenses paid by forgiven loan proceeds being non-tax-deductible.  We do expect this technical fix to come eventually.  

We expect more clarification as additional legislation is passed this year, so stay tuned.  Please reach out to us with any questions as to how these changes apply to your business.  

As such, before proceeding, please consult with us and other appropriate professionals, such as your accountant, and/or estate planning attorney on any details specific to you. Please don’t hesitate to reach out to us with your questions and comments. It’s what we are here for.

Emily Balmages, CFP®, CRTP

Director of Financial Planning, Warren Street Wealth Advisors

Investment Advisor Representative, Warren Street Wealth Advisors, LLC., a Registered Investment Advisor

If you have questions about any of this or would like to schedule a complimentary review you can Contact Us or call 714-876-6200 to book a free consultation.

The information presented here represents opinions and is not meant as personal or actionable advice to any individual, corporation, or other entity. Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional. Nothing in this document is a solicitation to buy or sell any securities, or an attempt to furnish personal investment advice. Warren Street Wealth Advisors may own securities referenced in this document. Due to the static nature of content, securities held may change over time and current trades may be contrary to outdated publications. Form ADV available upon request 714-876-6200.

Update: Relief Is On The Way: A CARES Act Overview

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This is a follow up to our first piece https://warrenstreetwealth.com/relief-is-on-the-way-a-cares-act-overview/ so if you have not yet read this first blog, please do so as this is a follow up to it.

With frequent updates from Washington and elsewhere regarding the policy response to COVID-19, we will continue to provide you with summary updates.  Please reach out to us with any questions you might have.

CHECKS

Many of you have received your stimulus checks via direct deposit.  If not, here is some additional information.  

If you did not file a 2018 or 2019 tax return, but are still eligible for a stimulus check, you can enter your information into this IRS website to receive your check: 

Non-Filers: Enter Payment Info Here

If you did not request direct deposit on your 2018 or 2019 tax return, but you would like to receive your stimulus check via direct deposit, you can enter your direct deposit information on this IRS website:

Get My Payment

It has been reported that both of the websites above have experienced technical issues since being launched, so patience and perseverance may be required.

If you prefer to receive your stimulus payment by paper check, you may have to wait several weeks for the payment to arrive. 

TAXES

The Treasury Department and IRS have delayed the Federal tax filing deadline for 2019 taxes to July 15, 2020.

California, along with most states (though not all), has conformed to the Federal deadline.

2020 Q1 and Q2 Federal estimated taxes are also now due July 15th. 

SMALL BUSINESSES

There are several updates regarding small business relief offered in the CARES Act.

1. EIDL

Originally the CARES Act called for the SBA to offer one-time emergency grants of $10k per business through the EIDL (Economic Injury Disaster Loan) program. Many of our small business owner clients applied. Recently, the SBA released an email to EIDL grant applicants, announcing that due to high demand, they’ve limited the one-time EIDL grant to $1k per employee (with a maximum of $10k total).

2. PPP

The demand for PPP (Paycheck Protection Program) loans has been extremely high. So high, in fact, that just 14 days after the program opened, the SBA announced that it had committed all of the originally allotted $349 billion.  As of Friday, April 24th, Congress and the President approved an additional $310 billion in funds for the program which offers potentially forgivable loans for small businesses and non-profits.  We expect this second round of funding to go quickly, so please reach out to us for guidance if you have not yet applied.  $60 billion of the new funding was specifically set aside for loans made by smaller institutions like credit unions and community banks, so we recommend considering one of these options first.    

3. Main Street Lending Program

Another relief option for small to medium sized businesses (up to 10,000 employees) may be the Federal Reserve’s new Main Street Lending Program: 

Main Street Lending Program

Details of the program are still being clarified, but as of this writing, here are some highlights:

  • Borrowers who received SBA PPP loans are eligible to apply for the MSLP as well.
  • Unlike PPP loans that can be potentially forgiven, MSLP loans do not offer a forgiveness provision.
  • Current proposed terms are 4 year repayment, $1 million minimum loan size, principal and interest payments are deferred for one year, relatively low interest rates.
  • Several other restrictions apply.  If you are a small or medium size business owner in need of funding, please reach out to us for further discussion.

CHARITABLE GIVING AND WAYS TO HELP

Food banks around the country have seen increased demands over the last several weeks. If you are looking for a way to help, you might want to check with your local food bank.  

The Red Cross is also reporting a severe blood shortage as a result of donor cancellations across the country.

This concludes our quick update.  News is flowing rapidly and changes to some of this information are inevitable.  We will continue to provide updates, but please contact us with any questions, comments or concerns.  Wishing you health and safety during these unprecedented times.  

As such, before proceeding, please consult with us and other appropriate professionals, such as your accountant, and/or estate planning attorney on any details specific to you. Please don’t hesitate to reach out to us with your questions and comments. It’s what we are here for.

Emily Balmages, CFP®, CRTP

Director of Financial Planning, Warren Street Wealth Advisors

Investment Advisor Representative, Warren Street Wealth Advisors, LLC., a Registered Investment Advisor

If you have questions about any of this or would like to schedule a complimentary review you can Contact Us or call 714-876-6200 to book a free consultation.

The information presented here represents opinions and is not meant as personal or actionable advice to any individual, corporation, or other entity. Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional. Nothing in this document is a solicitation to buy or sell any securities, or an attempt to furnish personal investment advice. Warren Street Wealth Advisors may own securities referenced in this document. Due to the static nature of content, securities held may change over time and current trades may be contrary to outdated publications. Form ADV available upon request 714-876-6200.

Relief Is On The Way: A CARES Act Overview

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Last Friday, in response to the COVID-19 pandemic, President Trump signed into law The CARES Act, a $2 trillion economic stimulus bill.

This bill, which appears to be the largest ever of its kind, will be studied and analyzed for months to come. 

Every Warren Street client will be impacted in some way.  Accordingly, we are reviewing every client situation to determine what proactive steps you can take to maximize the benefits available within this legislation.  We will provide some highlights here, and will be following up with each of you directly over the coming weeks.  As always, please reach out to us at any time with questions. 

In General

  • CHECKS!  : Most Americans can expect to receive rebates from Uncle Sam. Depending on your household income, expect up to $1,200 per adult and $500 per dependent child under age 17. To calculate your payment, the Federal government will look at your 2019 Adjusted Gross Income (AGI) if it is available, or your 2018 AGI if it is not. However, you will receive an extra 2020 tax credit if your 2020 AGI ends up lower than the figure used to calculate your rebate.
  • Taxpayers with Adjusted Gross Income (AGI) above certain thresholds start to lose benefits.  The phaseouts start at:

Married Joint:  $150,000

Head of Household:  $112,500

All Other Filers:  $75,000

From Michael Kitces at Nerd’s Eye View; reprinted with permission.

  • The reported plan is to send the rebates to direct deposit accounts linked to Social Security payments or the most recent tax return on file.  Paper checks will be sent to last known mailing addresses. 
  • ****TWO TIPS:
  •  If your 2019 income is lower than 2018 and moves you below the phaseout range, file your 2019 tax return ASAP.
  •  If you have recently moved, notify the IRS via this form:  Form 8822 (Rev. October 2015)
  • Retirement account distributions for coronavirus-related needs: You can tap into your retirement account prior to age 59.5 in 2020 for a coronavirus-related distribution of up to $100,000, without incurring the usual 10% penalty or mandatory 20% Federal withholding. You will still owe income tax on the distributions, but you can prorate the payment of these taxes across 3 years. You also can repay distributions to your account within 3 years to avoid paying income taxes, or to claim a refund on taxes paid.

***If cash flow is a problem right now, please reach out to us and we will help you strategize. 

  • Various healthcare-related incentives: For example, certain over-the-counter medical expenses previously disallowed under some healthcare plans now qualify for coverage. Also, Medicare restrictions have been relaxed for telehealth and other services (such as COVID-19 vaccinations, once they become available). Other details apply.

For Retirees (and Retirement Account Beneficiaries)

  • RMD relief: Required Minimum Distributions (RMDs) go on a holiday in 2020 for retirees, as well as beneficiaries with inherited retirement accounts. If you have not yet taken your 2020 RMD, don’t! If you have, please be in touch with us to explore potential remedies.

For Charitable Donors

  • “Above-the-line” charitable deductions: Deduct up to $300 in 2020 qualified charitable contributions (excluding Donor Advised Funds) if you are taking the standard deduction.
  • Donate all of your 2020 AGI: You can effectively eliminate 2020 taxes owed, and then some, by donating up to, or beyond your AGI. If you donate more than your AGI, you can carry forward the excess up to 5 years. Donor Advised Fund contributions are excluded.

For Business Owners (and Certain Not-for-Profits)

  • Paycheck Protection Program loans (potentially forgivable): The Small Business Administration (SBA) Paycheck Protection Program is making loans available for qualified businesses and not-for-profits (typically under 500 employees), sole proprietors, and independent contractors. Loans for up to 2.5x monthly payroll, up to $10 million, 2-year maturity, interest rate 1%. Payments are deferred and, if certain employment retention and other requirements are met, the loan may be forgiven.
  • Economic Injury Disaster Loans (with forgivable advance): In coordination with your state, SBA disaster assistance also offers Economic Injury Disaster Loans of up to $2 million to qualified small businesses and non-profits, “to help overcome the temporary loss of revenue they are experiencing.” Interest rates are under 4%, with potential repayment terms of up to 30 years. Applicants also are eligible for an advance on the loan of up to $10,000. The advance will not need to be repaid, even if the loan is denied.
  • Payroll tax credits and deferrals: For qualified businesses who are not taking a loan.
  • Employee retention credit: An additional employee retention credit (as a payroll tax credit), “equal to 50 percent of the qualified wages with respect to each employee of such employer for such calendar quarter.” Excludes businesses receiving PPP loans, and may exclude those who have taken the EIDL loans.
  • Net Operating Loss rules relaxed: Carry back 2018–2020 losses up to five years, on up to 100% of taxable income from these same years.
  • Immediate expensing for qualified improvements: Section 168 of the Internal Revenue Code of 1986 is amended to allow immediate expensing rather than multi-year depreciation.
  • Dollars set aside for industry-specific relief: Please be in touch for a more detailed discussion if your entity may be eligible for industry-specific relief (e.g., airlines, hospitals and state/local governments).

For Employees/Plan Participants

  • Retirement plan loans and distributions: Maximum amount increased to $100,000 on up to the entire vested amount for coronavirus-related loans. Delay repayment up to a year for loans taken from March 27–year-end 2020. Distributions described above in In General.
  • Paid sick leave: Paid sick leave benefits for COVID-19 victims are described in the separate, March 18 H.R. 6201 Families First Coronavirus Response Act, and are above and beyond any benefits received through the CARES Act. Whether in your role as an employer or an employee, we’re happy to discuss the details with you upon request.

For Employers/Plan Sponsors

  • Relief for funding defined benefit plans: Due date for 2020 funding is extended to Jan. 1, 2021. Also, the funding percentage (AFTAP) can be calculated based on your 2019 status.
  • Relief for facilitating pre-retirement plan distributions and expanded loans: As described above for Employees/Plan Participants, employers “may rely on an employee’s certification that the employee satisfies the conditions” to be eligible for relief. The participant is required to self-certify in writing that they or a direct dependent have been diagnosed, or they have been financially impacted by the pandemic. No additional evidence (such as a doctor’s release) is required.  
  • Potential extension for filing Form 5500: While the Dept. of Labor (DOL) has not yet granted an extension, the CARES Act permits the DOL to postpone this filing deadline.
  • Exclude student loan pay-down compensation: Through year-end, employers can help employees pay off current educational expenses and/or student loan balances, and exclude up to $5,250 of either kind of payment from their income.

For Unemployed/Laid Off Americans

  • Increased unemployment compensation: Federal funding increases standard unemployment compensation by $600/week, and coverage is extended 13 weeks.
  • Federal funding covers first week of unemployment: The one-week waiting period to start collecting benefits is waived.
  • Pandemic unemployment assistance: Unemployment coverage is extended to self-employed individuals for up to 39 weeks. Plus, the Act offers incentives for states to establish “short-time compensation programs” for semi-employed individuals.

For Students (or those with student loans)

  • Student loan payments deferred to Sept. 30, 2020:  No interest will accrue either. Important: Voluntary payments will continue unless you explicitly pause them. Plus, the deferral period will still count toward any loan forgiveness program you’re in. So, be sure to pause payments if this applies to you, lest you pay on debt that will ultimately be forgiven.
  • Delinquent debt collection suspended through Sept. 30, 2020: Including wage, tax refund, and other Federal benefit garnishments.
  • Employer-paid student loan repayments excluded from 2020 income: From the date of the CARES Act enactment through year-end, your employer can pay up to $5,250 toward your student debt or your current education without it counting as taxable income to you.
  • Pell Grant relief: There are several clauses that ease Pell Grant limits, while not eliminating them. It would be best if we go over these with you in person if they may apply to you.

For Estates/Beneficiaries

  • A break for “non-designated” beneficiaries: 2020 can be ignored when applying the 5-year rule for “non-designated” beneficiaries with inherited retirement accounts. The 5-Year Rule effectively ends up becoming a 6-Year Rule for current non-designated beneficiaries.

You’re now familiar with much of the critical content of the CARES Act! That said, given the complexities involved and unprecedented current conditions, there will undoubtedly be updates, clarifications, additions, system glitches, and other adjustments to these summary points. The results could leave a wide gap between intention and reality.

As such, before proceeding, please consult with us and other appropriate professionals, such as your accountant, and/or estate planning attorney on any details specific to you. Please don’t hesitate to reach out to us with your questions and comments. It’s what we are here for.

Emily Balmages, CFP®, CRTP

Director of Financial Planning, Warren Street Wealth Advisors

Investment Advisor Representative, Warren Street Wealth Advisors, LLC., a Registered Investment Advisor

If you have questions about any of this or would like to schedule a complimentary review you can Contact Us or call 714-876-6200 to book a free consultation.

DISCLOSURES

Reference Materials:

Investment Advisor Representative, Warren Street Wealth Advisors, LLC., a Registered Investment Advisor

The information presented here represents opinions and is not meant as personal or actionable advice to any individual, corporation, or other entity. Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional. Nothing in this document is a solicitation to buy or sell any securities, or an attempt to furnish personal investment advice. Warren Street Wealth Advisors may own securities referenced in this document. Due to the static nature of content, securities held may change over time and current trades may be contrary to outdated publications. Form ADV available upon request 714-876-6200.

Have You Heard of the “Mega Backdoor Roth IRA”?

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Chances are if you are reading this, you’re already at least somewhat familiar with a Roth IRA. While the contribution limit will vary over time, in 2019 the limit is $6,000, plus an additional $1,000 catch up contribution for individuals over the age of 50. This limit is per individual, allowing married couples to contribute up to a maximum of $12,000-$14,000 depending on their age. Direct contributions to a Roth IRA also have an income phase-out limit that you’ll need to be aware of, which starts at $122,000 for single filers and $193,000 for joint filers.

What if I told you there was a way to contribute to a Roth IRA well beyond these limits, regardless of your income level? At some employers, you can.

The typical “backdoor Roth IRA” is a strategy for individuals to contribute to a Roth IRA that are over the income phase-out limitation for a direct contribution. This can be beneficial for many people, but still caps your contributions at only $6,000 or $7,000 per year. In some cases, your 401(k) may allow the ability to contribute on an “after-tax” basis, which opens up a world of possibilities for additional Roth contributions.

Roth contributions are contributed on an after-tax basis(meaning no current tax deduction), but earnings grow tax-free as long as you meet all the withdrawal eligibility rules set by the IRS. This means you must be at least age 59 ½ and meet the IRS’ “5 year rule” at the time of withdrawal.

An “after-tax” contribution works similar to a Roth contribution, but the taxation differs slightly. A pure after-tax contribution also provides no current tax deduction, but earnings associated with the money grow only tax-deferred and are later taxable at ordinary income rates upon distribution. As you can see, Roth dollars are generally more valuable than pure after-tax dollars.

The good news is, there is a fairly easy way to convert your pure after-tax dollars into Roth dollars so that all earnings grow tax-free. Once you hit the $19,000(plus $6,000 catch up for individuals over the age of 50) annual limit for your pre-tax and/or Roth contributions into your 401(k), you will want to begin contributing on an after-tax basis.

Pure after-tax contributions are not subject to the typical annual contribution limit of $19,000 or $25,000. Instead, they are capped at an overall 401(k) contribution limit of $56,000 or $62,000. This overall limit includes all of your pre-tax, Roth, employer matching, and after-tax contributions combined. In other words, if you make $100,000 per year and are under the age of 50, your pre-tax/Roth contributions are $19,000, your employer match is $6,000, and your maximum after-tax contributions are $31,000. ($56,000 – 19,000 – 6,000 match = $31,000 of remaining after-tax contribution ability). This additional $31,000 could then be rolled into a Roth IRA, allowing for the “mega backdoor Roth” contribution. This means you can potentially get up to $37,000 per year into a Roth IRA!

There is one caveat to this however. When you convert your after-tax contributions to a Roth IRA, any earnings that are associated with the after-tax contributions that enter the Roth IRA will be taxable. If you contributed $10,000 after-tax and that money has since grown to $12,000, you will pay tax on the $2,000 should you put the full $12,000 into the Roth IRA. This can be circumvented by removing only the pure after-tax contributions(basis) and leaving account earnings in the 401(k) account to grow tax-deferred and be withdrawn at a later date. For this reason, the sooner you can get the money from the after-tax 401(k) to the Roth IRA, the sooner your money will be growing for you tax-free. Once the money is in the Roth IRA, you are open to the entire world of investing beyond what is offered in the 401(k) plan. You have the ability to have the money invested in mutual funds, ETFs, stocks, bonds, and with the oversight of professional management should you choose.

This is a great savings strategy for individuals who are looking to increase the amount of their retirement savings and want to do so in a tax-advantaged way. For individuals who have the excess cash flow and budgetary means of doing so, the “mega backdoor Roth” is a no brainer. While this strategy can be complex, once initially set up the ongoing maintenance is minimal. Warren Street Wealth Advisors is here to assist and facilitate after-tax contributions, conversions to Roth accounts, and the underlying investment management. For individuals looking to take advantage of this huge tax savings opportunity, be sure to contact us for help getting this strategy implemented for your situation. Please bear in mind this strategy is only applicable to individuals who are already maximizing their current pre-tax or Roth contributions in the 401(k).

If you have any questions on the strategy or investments and tax planning in general, be sure to reach out and contact us as we are happy to help. As with nearly everything financial planning, specific rules and details will need to be implemented on a case by case basis, so be sure to contact us with the specifics of your case.

Justin D. Rucci, CFP®

Wealth Advisor

Warren Street Wealth Advisors

 

Justin D. Rucci, CFP® is an Investment Advisor Representative, Warren Street Wealth Advisors, a Registered Investment Advisor. Investing involves the risk of loss of principal. Justin D. Rucci, CFP® is not a CPA or accountant and the information contained herein is considered for general educational purposes. Please seek a qualified tax opinion or discuss with your financial advisor as nothing in this publication is considered personal actionable advice.

End-of-the-Year Money Moves

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End-of-the-Year Money Moves

Here are some things you might want to do before saying goodbye to 2018.  

What has changed for you in 2018? Did you start a new job or leave a job behind? Did you retire? Did you start a family? If notable changes occurred in your personal or professional life, then you will want to review your finances before this year ends and 2019 begins.

Even if your 2018 has been relatively uneventful, the end of the year is still a good time to get cracking and see where you can plan to save some taxes and/or build a little more wealth.  

Do you practice tax-loss harvesting? That is the art of taking capital losses (selling securities worth less than what you first paid for them) to offset your short-term capital gains. If you fall into one of the upper tax brackets, you might want to consider this move, which directly lowers your taxable income. It should be made with the guidance of a financial professional you trust. (1)  

In fact, you could even take it a step further. Consider that up to $3,000 of capital losses in excess of capital gains can be deducted from ordinary income, and any remaining capital losses above that can be carried forward to offset capital gains in upcoming years. When you live in a high-tax state, this is one way to defer tax. (1)

Do you want to itemize deductions? You may just want to take the standard deduction for 2018, which has ballooned to $12,000 for single filers and $24,000 for joint filers because of the Tax Cuts & Jobs Act. If you do think it might be better for you to itemize, now would be a good time to get the receipts and assorted paperwork together. While many miscellaneous deductions have disappeared, some key deductions are still around: the state and local tax (SALT) deduction, now capped at $10,000; the mortgage interest deduction; the deduction for charitable contributions, which now has a higher limit of 60% of adjusted gross income; and the medical expense deduction. (2,3)

Could you ramp up 401(k) or 403(b) contributions? Contribution to these retirement plans lower your yearly gross income. If you lower your gross income enough, you might be able to qualify for other tax credits or breaks available to those under certain income limits. Note that contributions to Roth 401(k)s and Roth 403(b)s are made with after-tax rather than pre-tax dollars, so contributions to those accounts are not deductible and will not lower your taxable income for the year. They will, however, help to strengthen your retirement savings. (4)

Are you thinking of gifting? How about donating to a qualified charity or non-profit organization before 2018 ends? In most cases, these gifts are partly tax deductible. You must itemize deductions using Schedule A to claim a deduction for a charitable gift. (5)

If you donate publicly traded shares you have owned for at least a year, you can take a charitable deduction for their fair market value and forgo the capital gains tax hit that would result from their sale. If you pour some money into a 529 college savings plan on behalf of a child in 2018, you may be able to claim a full or partial state income tax deduction (depending on the state). (2,6)

Of course, you can also reduce the value of your taxable estate with a gift or two. The federal gift tax exclusion is $15,000 for 2018. So, as an individual, you can gift up to $15,000 to as many people as you wish this year. A married couple can gift up to $30,000 in 2018 to as many people as they desire. (7)

While we’re on the topic of estate planning, why not take a moment to review the beneficiary designations for your IRA, your life insurance policy, and workplace retirement plan? If you haven’t reviewed them for a decade or more (which is all too common), double-check to see that these assets will go where you want them to go, should you pass away. Lastly, look at your will to see that it remains valid and up-to-date.   

Should you convert all or part of a traditional IRA into a Roth IRA? You will be withdrawing money from that traditional IRA someday, and those withdrawals will equal taxable income. Withdrawals from a Roth IRA you own are not taxed during your lifetime, assuming you follow the rules. Translation: tax savings tomorrow. Before you go Roth, you do need to make sure you have the money to pay taxes on the conversion amount. A Roth IRA conversion can no longer be recharacterized (reversed). (8)

Can you take advantage of the American Opportunity Tax Credit? The AOTC allows individuals whose modified adjusted gross income is $80,000 or less (and joint filers with MAGI of $160,000 or less) a chance to claim a credit of up to $2,500 for qualified college expenses. Phase-outs kick in above those MAGI levels. (9)

See that you have withheld the right amount. The Tax Cuts & Jobs Act lowered federal income tax rates and altered withholding tables. If you discover that you have withheld too little on your W-4 form so far in 2018, you may need to adjust your withholding before the year ends. The Government Accountability Office projects that 21% of taxpayers are withholding less than they should in 2018. Even an end-of-year adjustment has the potential to save you some tax. (10)

What can you do before ringing in the New Year? Talk with a financial or tax professional now rather than in February or March. Little year-end moves might help you improve your short-term and long-term financial situation.

Justin D. Rucci, CFP®
Wealth Advisor
Warren Street Wealth Advisors

Justin is an Investment Advisor Representative of Warren Street Wealth Advisors, a Registered Investment Advisor. The information contained herein does not involve the rendering of personalized investment advice but is limited to the dissemination of general information. A professional advisor should be consulted before implementing any of the strategies or options presented.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional. Past performance may not be indicative of future results. All investment strategies have the potential for profit or loss. Changes in investment strategies, contributions or withdrawals may materially alter the performance, strategy, and results of your portfolio. Historical performance results for investment indexes and/or categories, generally do not reflect the deduction of transaction and/or custodial charges or the deduction of an investment-management fee, the incurrence of which would have the effect of decreasing historical performance results. Economic factors, market conditions, and investment strategies will affect the performance of any portfolio and there are no assurances that it will match or outperform any particular benchmark. Nothing in this commentary is a solicitation to buy, or sell, any securities, or an attempt to furnish personal investment advice. We may hold securities referenced in the blog and due to the static nature of the content, those securities held may change over time and trades may be contrary to outdated posts.

 

Citations

1 – nerdwallet.com/blog/investing/just-how-valuable-is-daily-tax-loss-harvesting/ [4/16/18]
2 – marketwatch.com/story/how-to-game-the-new-standard-deduction-and-3-other-ways-to-cut-your-2018-tax-bill-2018-10-15 [10/15/18]
3 – hrblock.com/tax-center/irs/tax-reform/3-changes-itemized-deductions-tax-reform-bill/ [10/10/18]
4 – investopedia.com/articles/retirement/06/addroths.asp [2/2/18]
5 – investopedia.com/articles/personal-finance/041315/tips-charitable-contributions-limits-and-taxes.asp [10/1/18]
6 – savingforcollege.com/article/how-much-is-your-state-s-529-plan-tax-deduction-really-worth [9/27/18]
7 – fool.com/retirement/2018/06/28/5-things-you-might-not-know-about-the-estate-tax.aspx [6/28/18]
8 – marketwatch.com/story/how-the-new-tax-law-creates-a-perfect-storm-for-roth-ira-conversions-2018-03-26 [9/15/18]
9 – fool.com/investing/2018/03/17/your-2018-guide-to-college-tuition-tax-breaks.aspx [3/17/18]
10 – money.usnews.com/money/personal-finance/taxes/articles/2018-10-16/should-you-adjust-your-income-tax-withholding [10/16/18]

Social Security Gets Its Biggest Boost in Years

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Social Security Gets Its Biggest Boost in Years

Seniors will see their retirement benefits increase by an average of 2.8% in 2019.

Social Security will soon give seniors their largest “raise” since 2012. In view of inflation, the Social Security Administration has authorized a 2.8% increase for retirement benefits in 2019. (1)

This is especially welcome, as annual Social Security cost-of-living adjustments, or COLAs, have been irregular in recent years. There were no COLAs at all in 2010, 2011, and 2016, and the 2017 COLA was 0.3%. This marks the second year in a row in which the COLA has been at least 2%. (2)

Not every retiree will see their benefits grow 2.8% next year. While affluent seniors will probably get the full COLA, more than 5 million comparatively poorer seniors may not, according to the Senior Citizens League, a lobbying group active in the nation’s capital. (1)

Why, exactly? It has to do with Medicare’s “hold harmless” provision, which held down the cost of Part B premiums for select Medicare recipients earlier in this decade. That rule prevents Medicare Part B premiums, which are automatically deducted from monthly Social Security benefits, from increasing more than a Social Security COLA in a given year. (Without this provision in place, some retirees might see their Social Security benefits effectively shrink from one year to the next.) (1)

After years of Part B premium inflation being held in check, the “hold harmless” provision is likely fading for the above-mentioned 5+ million Social Security recipients. They may not see much of the 2019 COLA at all. (1)

Even so, the average Social Security beneficiary will see a difference. The increase will take the average individual monthly Social Security payment from $1,422 to $1,461, meaning $468 more in retirement benefits for the year. An average couple receiving Social Security is projected to receive $2,448 per month, which will give them $804 more for 2019 than they would get without the COLA. How about a widower living alone? The average monthly benefit is set to rise $38 per month to $1,386, which implies an improvement of $456 in total benefits for 2019. (1)

Lastly, it should be noted that some disabled workers also receive Social Security benefits. Payments to their households will also grow larger next year. Right now, the average disabled worker enrolled in Social Security gets $1,200 per month in benefits. That will rise to $1,234 per month in 2019. The increase for the year will be $408. (1)

Justin D. Rucci, CFP®
Wealth Advisor
Warren Street Wealth Advisors

Justin is an Investment Advisor Representative of Warren Street Wealth Advisors, a Registered Investment Advisor. The information contained herein does not involve the rendering of personalized investment advice but is limited to the dissemination of general information. A professional advisor should be consulted before implementing any of the strategies or options presented.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional. Past performance may not be indicative of future results. All investment strategies have the potential for profit or loss. Changes in investment strategies, contributions or withdrawals may materially alter the performance, strategy, and results of your portfolio. Historical performance results for investment indexes and/or categories, generally do not reflect the deduction of transaction and/or custodial charges or the deduction of an investment-management fee, the incurrence of which would have the effect of decreasing historical performance results. Economic factors, market conditions, and investment strategies will affect the performance of any portfolio and there are no assurances that it will match or outperform any particular benchmark. Nothing in this commentary is a solicitation to buy, or sell, any securities, or an attempt to furnish personal investment advice. We may hold securities referenced in the blog and due to the static nature of the content, those securities held may change over time and trades may be contrary to outdated posts.

 

Citations
1 – fool.com/retirement/2018/10/26/heres-what-the-average-social-security-beneficiary.aspx [10/26/18]
2 – tinyurl.com/y9spspqe [8/31/18]