Perks of a California Retirement

Having a comfortable retirement doesn’t necessarily mean leaving The Golden State behind.

In our California-based advising firm we often see clients who would like to move out of the state at retirement (or sooner). There are plenty of reasons to re-settle, and if your only reason is “I want to” then that is good enough for us. But the retirement of your dreams doesn’t necessarily mean you need to pack up and move. Call us biased…but we love The Golden State! 

The State Tax Problem

A major concern for Californians is taxes. Our top state tax bracket is the highest in the nation. However, a retiree’s taxable income is not often in the highest bracket. The tax rates for most middle (and even upper-middle) class taxpayers are comparable to, and sometimes lower than, those in several other states.

To illustrate: in 2021 a single California taxpayer’s taxable income between $61,215 and $375,221 will be taxed at 9.3%. Compare that to a nice midwestern state like Minnesota. Their very top tax bracket is 9.85%, but it starts at taxable income over $166,041. So if your taxable income is between $166,041 and $375,221, you will pay similar state taxes whether you are in California or Minnesota.

Let’s look at a more realistic retirement income. Taxable income in retirement for an average married couple might be around $85,000. In California, their effective state tax rate for 2021 would be about 2.40%. If the couple decided to move to Arizona (a low tax state) in retirement, their effective state tax rate would be about 1.87%. That’s a difference of just $450 per year. Uprooting and moving states to save $450 in a year may not really be worth it!

It is true that state taxes are much lower in many other states. There are even states with no state income tax. But these states offset their lack of income tax with sales tax, property taxes, and other local taxes. The bottom line is: no state is going to let you put down roots for free. While California certainly is not the most taxpayer friendly state, for a large portion of residents the higher tax brackets are not going to be a factor.

Quality of Life in California

Two major considerations for quality of life are staying physically active and staying socially engaged. We know that a sedentary, perpetually isolated lifestyle is bad for your health. The mild-to-warm weather in California means your favorite activities can usually continue year-round, keeping you moving and socializing consistently throughout your life.

California has something for everyone. Do you prefer vibrant evenings out in the city or quiet mountain escapes? Yoga on the beach? Pickleball in the suburbs? Hiking in the desert? It’s all here.

Why Warren Street Loves CA

Why else does our team love California? When asked “What are some reasons a person might want to retire in California?” here is what we had to say:

  • “Many job prospects for those who want to have a part-time retirement living.”
  • “On the tax note, Prop 13 and Prop 19 can keep CA property taxes low.”
  • “Good access to medical care and good doctors in most of CA.”  
  • “Diverse population and diverse cultures in CA.”  
  • “California is a great hub for entertainment and tourism.” 
  • “Home to multiple beaches, national parks, etc.” 
  • “CA is the largest municipal bond market by issuance.” 
  • “In-N-Out.”

Every state has something great to offer. Above all, we love to see our clients happy and living their best life – before and after retirement.

Do you want to continue your California dream after you retire? Or do you want to try somewhere new? Whatever your goals, Warren Street is here to help you make them reality.

Kirsten C. Cadden, CFP®

Associate 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.

References:

https://www.thebalance.com/state-income-tax-rates-3193320

https://www.nerdwallet.com/article/taxes/california-state-tax

https://smartasset.com/taxes/california-tax-calculator

Should I Sell My Chevron Stock?

As a Chevron employee-turned-financial-advisor, I’m passionate about helping current employees plan for their retirements. With Chevron stock recently hitting a high of $170.901 (as of 03/10/2022), I’ve been hearing from a number of Chevron employees wondering if this is the time to sell. This is the highest price Chevron stock has hit in 10 years, and as the old adage goes, “Buy low, sell high!” Still, there are other considerations for Chevron employees, such as portfolio diversification and ESOP shares. 

While no one has a crystal ball to know what the market will do, here’s a summary of what I’ve been sharing with my clients to help them make an informed decision on whether or not to sell their Chevron stock.

1. Remember the value of diversification. 

When I first meet my Chevron clients, many are 100% invested in Chevron stock. Almost immediately, I will advise clients to consider the value of diversifying their portfolio. 

While Chevron has had a very good run as of late thanks to the political and economic factors beyond the company’s control, the stock has underperformed the S&P 500 (an index of 500 stocks) over the last 10 years, returning an annual 8% compared to the S&P 500’s 14.6% yearly return (data as of 4/01/2022)1

Had you diversified into one of the most simple indices like the S&P 500, you would have gained an additional 6% per year. While you probably don’t want to switch to being invested only in the S&P 500, you do want to recognize that it is possible to both reduce single stock risk and potentially increase or at least stabilize your investment return at the same time. 

2. Consider how global factors impact timing. 

But the stock’s up 40%1 this year (data as of 4/01/2022)!

That’s true, but it can also introduce recency bias into our decisions. The war in Ukraine has contributed to high oil prices, which is a primary reason Chevron stock recently shot up to $170.90 (as of 03/10/2022). We’ve seen oil prices skyrocket in the past, and more often than not they will make their way back down as political tensions ease, supply increases, and demand levels.

To remove the impact of the war (and for simplicity’s sake), let’s look at 10 year returns on 12/31/2021 (just three months ago). Chevron’s 10 year return significantly underperformed the S&P 500 at an annual 5% return compared to 16%, respectively1. The stock has certainly surged in 2022, but we encourage you to look past recency bias. 

If you’ve been considering diversifying or selling Chevron stock for a while now but haven’t gotten around to it yet, now is a great time to talk to your advisor to see if it makes sense for you.

3. Do NOT sell your ESOP shares. 

While ESOP shares are not a benefit for new employees, most employees who were hired over ten years ago most likely still have them. These shares are eligible for a special tax treatment that may be able to save you a significant amount in taxes. This tax treatment is known as Net Unrealized Appreciation, or NUA. In order to take advantage of this strategy, you must maintain the ESOP shares until your retirement date and follow a specific procedure in distributing your retirement assets. Talk to your advisor for a more detailed explanation.

It’s impossible to predict the market, but the best we can do is make informed decisions when given the opportunity. Hopefully, you’ve found this summary helpful — but please be sure to speak with a financial advisor before making a decision to sell. If you have any questions, feel free to reach out to me using this link here!

Len Hanson

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.

Footnotes:

  1. Data from YCharts

Could I Retire Early from Chevron?

As a financial planner whose client base is largely made up of Chevron employees and retirees, I can’t tell you how many times I’ve gotten questions about early retirement in the last year. It seems people are enjoying the freedom of working remotely and are interested in at least exploring — if not executing on — their early retirement options. 

This is an exciting prospect but a very serious decision, so I thought it would be helpful to lay out the key considerations to help my clients and other Chevron employees weigh their options. Review the points below to help you understand your choices, and feel free to reach out to me by clicking here if you would like to discuss further!

1. Review the “Rule of 55.”

Start by giving serious thought to your current age, spouse’s age if applicable, and your target retirement age. In general, 55 is the “golden age” for Chevron employees to retire early. We refer to it as the “Rule of 55.” If you leave before that, you’ll have to leverage Rule 72(T), which isn’t advisable, as it locks you into an extremely strict distribution plan. It’s also important to note that the Rule of 55 applies only to you as the Chevron employee, not your spouse (unless his or her company offers a similar plan).

2. Weigh your pension options.

For most clients, age 50-55 is a major accumulation phase — and Chevron clients are no different. Plus, the pension for Chevron employees starts really ramping up when you turn 50. The longer you stick with the company (in general), the more you accrue these pension benefits.

3. Know where your medical benefits stand.

From day one on the job at Chevron, you start accruing eligibility for retiree medical benefits. When deciding on your retirement timing, you must consider how much you have built up — for instance, when I turned 55, I was 97% eligible for retiree medical retirement benefits. But if someone retires before 50, they receive no medical retirement benefits at all. 

In Summary

No matter when you decide to retire, it’s important to find an advisor you trust, so you can be transparent and open in your financial situation and goals. While these are important considerations, there is no hard and fast rule that says you have to retire at a certain age, life stage, or on anyone’s timeline but your own. 

Take me, for instance — I could have stayed eight months longer at Chevron for slightly higher retirement benefits, but I chose to focus on pursuing my passion of helping people at Warren Street instead. My goal with clients is to lay out the options so you can make an informed decision, knowing that ultimately the choice of when to retire is no one’s but your own.

If you’re interested in speaking further about your retirement options at Chevron and what your personal timing might look like, feel free to schedule a no-cost consultation with me at the link here

Len Hanson

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.

5 Bare Essentials to Consider When Retiring from SCE

Retirement can seem like the most exciting thing in the world — and the most overwhelming. On one hand, you finally get to spend your time on your terms. Maybe that’s traveling the world. Maybe it’s spending more time with your grandkids. Or maybe it’s just spending quiet evenings at home. 

Still, there’s that lingering question: “How does this all work?” So much goes into planning for retirement, as well as managing your money appropriately once you get to that point. It can be unnerving to consider how you’ll manage the nuances of your retirement plan, navigate Social Security benefits, and ensure you have the money you need to support your lifestyle in retirement. 

At Warren Street Wealth Advisors, we hear these concerns from clients often. In response, we’ve developed a specialty focus on retirement planning for Southern California Edison employees. After helping hundreds of SCE retirees navigate this crucial time, we know your retirement packages and employee benefits programs inside and out. Below are the top five bare essentials you need to know to retire from SCE.

1. Take your final distribution when you want.

It’s a common misconception that you are forced to take your final distribution at retirement, but that’s not the case. You can wait until Jan. 1, request your final distribution, and then take a direct payment to avoid penalties using the “55 Rule” if you are 55 years or older. This will also allow you to defer the income tax due until the following year’s tax return.

2. Understand that it’s possible to retire penalty-free between age 55 and 59 ½.

Here’s a scenario we see all the time: you’re 57. You want to retire. You don’t want to wait until 59 ½ to do it. But you know that there’s a 10% federal tax penalty and a 2.5% California state tax penalty if you take the money out of your IRA before 59 ½. So are you stuck? Nope.

There are a lot of moving parts to this process, but we can take advantage of IRS rules like 72(t) distributions or the previously mentioned “55 Rule” to ensure our clients do everything possible to avoid paying penalties.

3. Take advantage of your medical subsidy.

Did you know that you are eligible for a retiree medical subsidy? The most common subsidies are 50% and 85%. When you retire, Edison will pay either 50% or 85% of your current medical insurance premium as a “continuation benefit” in retirement. Simply put, what you pay today is what you’ll pay in retirement. Of course, this is as long as you reach your required benefit milestone. (Unsure what your benefit is? Call EIX Benefits at 866-693-4947 to ask what benefit you have and at what age you’ll receive it.)

4. Weigh your Social Security options.

There is all kinds of information out there about what to do with your Social Security. Let us boil it all down: you don’t have to take it at 62! When we build a financial plan for a client, we calculate all options for optimizing Social Security. It’s ultimately your decision, but we suggest weighing your options before committing to collecting the 25-30% reduced benefit at age 62.

5. Use your 401(k) efficiently.

Your 401(k) can be an immensely powerful tool if you understand how to max it out and diversify your investments. In most cases, this is the point at which you’ll want to hire a professional team to help. One tool that can help you is the Charles Schwab Personal Choice Retirement Account (PCRA) option included in your 401(k) plan. The PCRA option lets you purchase investments on your own or hire a professional advisor to do it for you. This is made available through your Tier 3 option. 

These are just a few of the tips and resources we offer SCE employees. For a deeper dive into strategies you can take to help you maximize your money in retirement, download our full SCE Retirement Handbook here.

Want to chat further? Feel free to reach out. We’ve worked with hundreds of employees with your exact plan and are glad to point you in the right direction.

Cary Facer

Founder and 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.

How Interest Rates Impact Your Chevron Pension

Rising interest rates have been a hot topic in the financial press, and many of my clients are wondering what the impact will be on their Chevron pension — specifically, their lump sum. 

As a retired Chevron employee, I understand these concerns firsthand! I monitored rates extraordinarily closely myself until I retired five years ago. The lump sum option is a great one for many people, but it is massively influenced by interest rates. Even a single percentage change in interest rates can dramatically impact your lump sum number via an inverse relationship. That is to say, as interest rates increase, your lump sum lessens. And as interest rates decrease, your lump sum grows. 

This gives you the potential to walk away with a large lump sum when you retire, but it also comes with the risk and emotional drain of fluctuating interest rates. One of my clients, for example, saw his lump sum drop from $1,080,000 to $1,040,000 in a 30-day period. Changes like that can be hard to swallow, and it’s particularly disconcerting when you don’t know how long these rate spikes will last. 

At Warren Street, we follow the tier 3 rates (the IRS segment Chevron uses to calculate your lump sum) extremely closely, so we can help you run projections for your specific case. Everyone’s situation is different, so I encourage you to give me a call if you are nervous at all, regardless of your current lump sum or retirement time horizon. However, in general:

  • If you’re thinking about retiring in the next 12-24 months or so, it might be a good time. Let’s run the numbers and see.
  • If you’re looking at two to five years or more for retirement, these interest rate spikes may not affect you. When they go back down, your lump sum will rise back up. Age and service credits will also help make up the difference from any interest rate changes.

If you’re finding yourself talking to your friends, coworkers, spouse, or others about this topic, give me a call — I will help you run the numbers so you can make an informed decision. The question of, “Do I have enough?” is never an easy one, and I’m here to help you understand all your options with data-driven insights so you can make the best choice for your family.

Feel free to contact me if you have any questions,

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

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

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

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

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.