Preparing for the Months Ahead

By: Lance C. Steiner, CFP® - Senior Financial Planner

It is hard to believe we are already in the fourth quarter of 2020. Usually by this time of year, vacations are over, children and grandchildren are settled back into school, and the focus begins to shift toward the upcoming holidays. However, as we are all reminded daily, 2020 has been anything but an ordinary year. We are in the midst of a global health pandemic. There is civil unrest across the country and we are approaching a presidential election with a close race between two individuals who are vastly different. Due to these uncertainties, you probably have more on your mind than just planning for the holidays. Many individuals find themselves asking what they should be doing right now to plan for the months ahead.

There is no way to know with certainty what will happen between now and the end of the year, but there are several things you can control to better position yourself for these times of uncertainty.

Review your investment allocation to ensure it is appropriate for your needs

Making sure you have the appropriate investment allocation can be one of the most beneficial ways to prepare for market volatility or a correction. Corrections and bear markets are part of the economic cycle, so it is important to have an appropriate level of cash and fixed income ahead of time. If you are retired, it is crucial to have an adequate amount in cash and fixed income to fund your distribution needs. We suggest keeping four to five years of your future cash needs in cash, CDs, and fixed income securities (such as bonds or treasuries). This helps you avoid the need to sell equities, i.e. stocks, when the market is down. For individuals with a longer time horizon (10+ years), it is important to establish emergency savings to cover any immediate cash needs that may arise.

Review your 401(k), 403(b) or employer provided retirement plan allocation

Typically, employer provided retirement plans have a list of available mutual funds and/or life cycle funds participants can select for their investment allocation. Many of the available funds are index funds, which means they track an index such as the S&P 500. If you do not regularly rebalance your allocation, you may end up having more exposure to equities and the stock market than you realize. In times of uncertainty, it is especially important to ensure the allocation is in line with your risk tolerance. I encourage you to review your current investment allocation and contact our office to discuss it with your advisor.

Consider a Roth conversion

Earlier this year, Congress passed the CARES Act, which waived Required Minimum Distributions (RMDs) for individuals over the age of 70.5 and individuals with an inherited IRA. Depending on the amount of your typical IRA distribution and your projected tax bracket, it may be beneficial to complete a Roth Conversion. Former Vice President Biden has said that taxes will not increase for individuals making less than $400,000. However, the U.S. debt is nearing $30 Trillion, and congress has continued talks on another relief bill for Coronavirus aid, so there is a widespread expectation that taxes will eventually increase. Thus, if you have some room in the 12% tax bracket, or in some cases the 22% tax bracket, it may be beneficial to explore this opportunity. Completing a Roth conversion will allow the funds to grow tax-free, and qualified distributions in the future will be tax-free.

Even if you are retired, you may pay tax at a lower rate on a Roth conversion today and will reduce the amount you are required to take out of your qualified plans in the future. This may also be an opportunity for generational planning if you have a substantial amount in your IRA and your beneficiaries are in a higher tax bracket than you. Please consult your financial planner or tax advisor to discuss this opportunity.

Consider increasing your income before year-end

During this time of year, it is common practice for our firm to review capital gains and IRA distributions to look for tax planning opportunities. In some situations, we look for opportunities to take extra capital gains at 0% or IRA distributions to increase income in the lower tax brackets. Tax planning can be a challenge in any election year and this year it could be especially difficult due to the close race and the number of mail-in ballots expected. As I previously mentioned, in many cases it is beneficial to try to increase your income to the top of your current tax bracket if you expect your income to be similar or higher in the future. The Biden tax proposal targets people making over $400,000, though it’s not clear whether this is for a single person or a married couple filing jointly. In either case, it would be a good idea to contact your tax advisor now to discuss the situation, especially if you fall into the targeted income category.

Please take some time to review these planning strategies and prepare for the coming weeks and months. Every situation is different, so please reach out to your Buckingham Advisors team to discuss these items further. Additionally, our office is hosting a live webinar on October 28, 2020 at 11:30am to discuss The Year 2020 and the Impact of the Upcoming Election on Your Finances and Taxes. Please click here to register or go to the Events tab on our website.