Don’t touch your face – or your 401(k)
It’s important to keep your financial priorities top of mind during an unexpected hardship, such as the COVID-19 pandemic. Assumptions, like needing to sell your investments because of poor market conditions, or halt contributions to your 401(k), can hurt your financial stability in the long-term. Below, we review steps you can take to stay financially secure and mitigate the effects of a financial hardship while possibly taking advantage of the current market conditions.
- Create or update your budget. Review those items that are essential to your spending. Review your discretionary expenses: monthly memberships, take out dinners, or premium cable bills. Evaluate what is essential spending during this time and see if you need to make some changes.
- Review your Emergency Fund. Do you have enough cash on hand to cover your normal expenses? How many months of expenses can you cover? Do you anticipate any large expenditures in the next month or two?
- Refinance your mortgage. Mortgage rates have actually dropped recently and there could therefore be a good chance that you could refinance your current mortgage to a lower rate.
- Roth Conversion. If you have ever considered converting your Traditional IRAs, now may be a great time if you can afford to pay the tax on the conversion. If you convert while the account values are lower, you will pay less taxes and give your contributions the opportunity to grow tax deferred in your Roth IRA.
- Fund your IRAs. If you are over the income limit to make a deductible IRA contribution, consider funding your IRA and immediately converting it to your Roth IRA. This is also known as a back-door Roth IRA. Either way, if you think that the market will recover in the next few years, now could be a great time to invest.
- 401(k) Contributions. Continue to fund your 401(k). As the market goes down, you are dollar cost averaging. This means that even if you don’t know when the market is at the bottom, you are continuing to average your purchase prices along the way.
- Tax Loss Harvesting. If you have individual stock or mutual fund positions in a taxable account that are below what you purchased them at, consider harvesting those tax losses. For example, if you have a Large Cap Value Mutual Fund that has lost value, sell it and replace it with a different Large Cap Value fund. You will recognize the loss and still be invested
- Rebalance your portfolio. If you set your allocation to something like 80% stocks and 20% fixed income, and the market has dropped 20%, your stocks may be closer to 75% of your portfolio. Rebalance your account so that you sell 5% of your bond funds and purchase 5% of your stock funds, thus bringing your portfolio back to its original allocation. Your portfolio will do better if the market starts to recover.
- Required Minimum Distributions (RMDs). The Secure Act, passed at the end of 2019, changes the age to start RMDs from 70 ½ to 72. The CARES acted, passed on March 27, 2020, allows those over the age of 72 to skip their RMDs for 2020.
- Emergency Funds from your Retirement Plan. If you qualify, you can take a COVID-19 related distribution from your retirement plan in 2020. This allows individuals under the age of 59 ½ to avoid a 10% early withdraw penalty for withdraws up to $100,000. The taxes from the distribution can be paid over the course of three years, or an individual can repay it as a loan.
Everyone’s individual financial situation is different. As the ever-changing business climate evolves, as a result of the COVID-19 pandemic, it’s important to evaluate your circumstances with a professional financial advisor. To talk to an expert, please contact Sikich.
This does not constitute tax advice. Please consult a tax professional.