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$2 Trillion Stimulus Plan Changes For Corporate Plans, Ira’s, Roth’s

The Federal Government’s massive COVID-19 stimulus package covers many areas of relief for businesses and individuals. Below is a summary of how this recent legislation may affect your tax-deferred retirement accounts and withdrawals from those accounts including RMD’s.

Relief for Retirement Accounts

Buying time: deadline for filing the following has been extended to July 15, 2020:

  • Tax return filing date (IRS Notice 2020-18)
  • IRA and Roth IRA contributions for 2019
  • HSA contributions
  • Archer Medical Savings Accounts contributions
  • Coverdell Education Savings Account contributions

CARES Act Relief: Here are RMDs Waived for 2020

  • 2019 RMDs due by April 1, 2020 (if delayed to January 1, 2020 or later)
  • 2020 RMDs from company plans and IRAs
  • 2020 RDMs from plan, IRA or Roth IRA beneficiaries

RMDs taken this year can be undone if they are eligible to be rolled over. To be eligible:

  • Must be within 60 days
  • There must not have been an IRA-to-IRA or Rother IRA to Roth IRA rollover in the 12 months preceding the receipt of the 2020 RMD
  • Non-spouse beneficiaries cannot undo RMDs already taken

Relief for individuals

  • Relief is available to individuals if they, a spouse or dependents are diagnosed with COVID-19 and
  • Experience adverse financial consequences from being quarantined, furloughed, laid off, reduced work hours, unable to work due to lack of childcare, closing or reducing hours of a business owned or operated by the individuals, or “other factors” to be determined by the Treasury

10% early distribution penalty

  • This penalty is waived on up to $100,000 of 2020 distributions from IRAs and company plans (aggregated) for coronavirus-related distributions
  • The tax would be due, but could be spread evenly over three years, and the funds could be repaid over the three-year period
  • Affected individuals who over age 591/2 (not subject to the 10% penalty) can still take advantage of the three-year income tax deferral and payback

Plan Loan Relief

  • For affected individuals, the maximum amount of plan loans is increased from $50,000 to the lesser of $100,000 (reduced by other outstanding loans) or 100% of account balance
  • This relief applies to loans taken within 180 days from the bill’s date of enactment
  • Any loan repayments normally due between date of enactment and December 31,2020 could be suspended for one year
  • IRAs do not allow loans
Source: Ed Slott – Financial Planning Online, March 27th, 2020.
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If You Have or Are a Stay-At-Home Spouse, You Should Consider a Spousal IRA

An ongoing study of IRA accounts has consistently found that women, on average, have lower retirement savings balances than men (see chart below).

Though there may be multiple reasons for this disparity, the most fundamental are the wage gap between men and women and the fact that women are more likely than men to take time off to care for children and other family members (1).

This traditional wage gap has been narrowing when you consider younger women, and also the fact that more men are stay-at-home dads. But the imbalance remains (2).

Obviously, earning less makes it more difficult to save for retirement. And a mother — or father — who stays at home to take care of the children may not be contributing to a retirement account at all. The same situation could arise later in life if one spouse works while the other takes time off or retires.

Additional Savings Opportunity

A spousal IRA — funded for a spouse who earns little or no income — offers an opportunity to help keep the retirement savings of both spouses on track. It also offers a larger potential tax deduction than a single IRA. A spousal IRA is not necessarily a separate account — it could be the same IRA that the spouse contributed to while working. Rather, the term refers to IRS rules that allow a married couple to fund separate IRA accounts for each spouse based on the couple’s joint income.

For tax years 2019 and 2020, an individual with earned income from wages or self-employment can contribute up to $6,000 annually to his or her own IRA and up to $6,000 more to a spouse’s IRA — regardless of whether the spouse works or not — as long as the couple’s combined earned income exceeds both contributions and they file a joint tax return. An additional $1,000 catch-up contribution can be made for each spouse who is 50 or older. Contributions for 2019 can be made up to the April 15, 2020, tax filing deadline.

All other IRA eligibility rules must be met. If a spousal contribution to a traditional IRA for 2019 is made for a nonworking spouse, she or he must be under age 70½; the age of the working spouse does not matter for purposes of the spousal IRA. For contributions made in 2020 and later years, the age 70½ restriction has been eliminated by the SECURE Act.

Traditional IRA Deductibility

If neither spouse actively participates in an employer-sponsored retirement plan such as a 401(k), contributions to a traditional IRA are fully tax-deductible. However, if one or both spouses are active participants, federal income limits may affect the deductibility of contributions.

For 2019, the ability to deduct contributions to the IRA of an active participant is phased out at a joint modified adjusted gross income (MAGI) between $103,000 and $123,000, but contributions to the IRA of a nonparticipating spouse are phased out at a MAGI between $193,000 and $203,000 (for 2020, phaseout ranges increase to $104,000–$124,000 and $196,000–$206,000, respectively).

Thus, some participants in workplace plans who earn too much to deduct an IRA contribution for themselves may be able to make a deductible IRA contribution for a nonparticipating spouse.

Withdrawals from traditional IRAs are taxed as ordinary income and may be subject to a 10% federal income tax penalty if withdrawn prior to age 59½, with certain exceptions as outlined by the IRS.

1,2 – Pew Research Center, 2019
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How Long Should Your Keep Financial Records?

Now that tax season is almost over, you may want to file your most recent records and discard older records to make room for the new ones. According to the IRS, personal tax records should be kept for three years after filing your return or two years after the taxes were paid, whichever is later* (different rules apply to business taxes).

It might be helpful to keep your actual tax returns, W-2 forms, and other income statements until you begin receiving Social Security benefits.

The rules for tax records apply to other records you use for deductions on your return, such as credit card statements, utility bills, auto mileage records, and medical bills. Here are some other guidelines if you don’t use these records for tax purposes.

  • Financial statements. You generally have 60 days to dispute charges with banks and credit card companies, so you could discard statements after two months. Once you receive your annual statement, throw out prior monthly statements.
  • Retirement plan statements. Keep quarterly statements until you receive your annual statement; keep annual statements until you close the account. Keep records of nondeductible IRA contributions indefinitely to prove you paid taxes on the funds.
  • Real estate and investment records. Keep these at least until you sell the asset. If the sale is reported on your tax return, follow the rules for tax records.
  • Loan documents. Keep documents and proof of payment until the loan is paid off. After that, keep proof of final payment.
  • Auto records. Keep registration and title information until the car is sold. You might keep maintenance records for reference and to document services to a new buyer.
  • Medical records. Keep records indefinitely for surgeries, major illnesses, lab tests, and vaccinations. Keep payment records until you have proof of a zero balance.

Other documents you should keep indefinitely include birth, marriage, and death certificates; divorce decrees; citizenship and military discharge papers; and Social Security cards.

Be mindful of the dangers of identity theft. You should never dispose of sensitive information by just throwing it in the trash can. Instead, you should use a shredder to shred any paper records containing confidential information such as Social Security numbers and financial account numbers.

*Keep tax records for at least six years if you underreported gross income by more than 25% (not a wise decision) and for seven years if you claimed a deduction for worthless securities or bad debt.
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Stock Ownership Slow to Recover

Dynamic versus Static Investment Risk Strategy

This is the first of a two-part article on Dynamic versus Static Risk Strategy. 

Fifty-five percent of Americans said that they (and/or a spouse) had money invested in the stock market in 2019. Since this is the same percentage of Americans as was reported in 2018, it’s obvious stock ownership still has a way to go before it recovers to pre-recession ownership levels. Cleary, stock market investor caution remains high despite a decade of strong market recovery.

Where are people placing their investment bets? Most likely, they’re using a financial industry-standard method of managing portfolio risk, exemplified by the widely-used “60/40 portfolio.

A 60/40 portfolio refers to allocating 60% of asset investments to stocks and  40% to bonds. The “risk management” aspect of this strategy is the 40% of assets held in bonds, which are expected to act as a buffer to stocks during Bear markets. Bonds tend to hold up in times of stock distress.

The 60/40 portfolio is so common that investors can find a Balanced Fund by throwing a dart at the mutual funds page of their Sunday newspapers. This passive, unchanging method to manage risk is termed static risk management and it’s not the best approach.

We recommend a dynamic versus a static portfolio strategy. Why is that you ask?

In a bear market, when risk and losses are high, static risk-management measures are not enough. In a bull market, when stock risk is low, static risk-management measures are too much to minimize your risk and optimize your returns.

If you think about it, a STATIC portfolio – with its constant, unchanging allocations to stocks and bonds – is a bit like preparing for any weather you might encounter by dressing half your body for warm weather and the other half for cold weather. On average, you’ll be comfortable. But, as that analogy shows, an average like that doesn’t really make much sense.

For example, if for the 2008 and 2009 bear market, we had a static risk-managed balanced portfolio of 60% stocks and 40% bonds, we’d have a top-to-bottom loss of -34.70%.

This loss is well beyond the risk tolerance capacity of the vast majority of investors and would be deemed a disaster by any reasonable person.

Now, consider what would happen with a static risk management approach in the subsequent up years that followed the recession. The 60/40 allocation wouldn’t have performed as well as it could have because of the drag on performance caused by the 40% bond allocation.

As you can see, STATIC risk management would have supplied too little protection in the recession, but too much to keep you from capitalizing on significant gains during the good times that followed.

The goal of Dynamic Risk Management is to apply more risk management in the bad times – when the need is greatest – and less in the good times – when the need is reduced.

In the second part installment of this article, we’ll cover how can you accurately identify the conditions in which more or less risk management should be applied.

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Social Security

Social Security May Offer You a Lifetime of Protection

Social Security is much more than a retirement program. Most Americans are protected by the Old-Age, Survivors, and Disability Insurance (OASDI) program — the official name of Social Security — from birth through old age. Here are four times in your life when Social Security might matter to you or the people you care about.

When You Start Your Career

Your first experience with Social Security might be noticing that your paycheck is smaller than you expected due to FICA (Federal Insurance Contributions Act) taxes. Most jobs are covered by Social Security, and your employer is required to withhold payroll taxes to help fund Social Security and Medicare.

Although no one likes to pay taxes, when you work and pay FICA taxes, you earn Social Security credits, which enable you (and your eligible family members) to qualify for Social Security retirement, disability, and survivor benefits. Most people need 40 credits (10 years of work) to be eligible for Social Security retirement benefits, but fewer credits may be needed to receive disability benefits or for family members to receive survivor benefits.

If You Become Disabled

Disability can strike anyone at any time. Research shows that one in four of today’s 20-year-olds will become disabled before reaching full retirement age.¹

Social Security disability benefits can replace part of your income if you have a severe physical or mental impairment that prevents you from working. Your disability generally must be expected to last at least a year or result in death.

When You Marry…or Divorce

Married couples may be eligible for Social Security benefits based on their own earnings or on a spouse’s earnings.

When you receive or are eligible for retirement or disability benefits, your spouse who is age 62 or older may also be able to receive benefits based on your earnings if you’ve been married at least a year. A younger spouse may be able to receive benefits if he or she is caring for a child under age 16 or disabled before age 22 who is receiving benefits based on your earnings.

If you were to die, your spouse may be eligible for survivor benefits based on your earnings. Regardless of age, your spouse who has not remarried may receive benefits if caring for your child who is under age 16 or disabled before age 22 and entitled to receive benefits based on your earnings. At age 60 or older (50 or older if disabled), your spouse may be able to receive a survivor benefit even if not caring for a child.

If you divorce and your marriage lasted at least 10 years, your former unmarried spouse may be entitled to retirement, disability, or survivor benefits based on your earnings.

When You Welcome a Child

Your child may be eligible for Social Security if you are receiving retirement or disability benefits, and may receive survivor benefits in the event of your death. In fact, according to the Social Security Administration, 98% of children could get benefits if a working parent dies.² Your child must be unmarried and under age 18 (19 if a full-time student) or age 18 or older with a disability that began before age 22.

In certain cases, grandchildren and stepchildren may also be eligible for benefits based on your earnings.

Know the Rules

To receive any type of Social Security benefit, you must meet specific eligibility requirements, only some of which are covered here. For more information, visit ssa.gov.

Copyright © 2020 Wootton Financial Group, All rights reserved.
This communication is strictly intended for individuals residing in the state(s) of TX. No offers may be made or accepted from any resident outside the specific states referenced.
Prepared by Broadridge Advisor Solutions Copyright 2020.
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