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Weekly Wealth of Knowledge - Week of 5/11/2020

| May 12, 2020
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The Weekly Wealth of Knowledge is your download of this week's most important topics related to financial planning, the markets, and our community. In this issue:

  • Silver linings of economic disruptions - Roth IRA conversions (3 minute read)
  • Student loan forbearance (2 minute read)
  • Risk versus uncertainty - a conversation (20 minute video- well worth the time)

Enjoy!

Silver Linings of Economic Disruptions

This month we are going to focus on timely financial planning “action items” that everyone can act on given our current economic environment. This week’s to do is evaluating if you can take advantage of a Roth Conversion given the market volatility. A Roth Conversion is when you convert money from a pre-tax Individual Retirement Account (“IRA”) to a Roth IRA. A Roth IRA is an account where money is contributed after-tax and grows tax-free, meaning that once the money is in the Roth, you generally do not pay tax on any of the earnings. Some savers can contribute to a Roth directly, but there are income limitations that prevent many from taking advantage of the tax-free growth. Converting the funds involves transferring pre-tax assets from your IRA into a Roth and paying taxes on the amount converted from your IRA in this tax year. After, the converted funds grow tax fee in a Roth. When market values decline it provides an opportunity to convert assets at a reduced value, anticipating that the value will come back to where it was before the conversion, and continue to grow tax free. A win-win for investors.

Since you must pay tax on the conversion today there are a lot of things to consider before acting. Questions to ask are: 1.) will your taxes be higher in the future than they are now? 2.) Will your income be higher in future years? And 3.) can I afford to pay the taxes this year? Question 3 is particularly important since those under 59.5 will have to pay the taxes out of pocket on any amount converted (vs. withholding taxes on the conversion itself). These are just a few of the considerations, but if you would like to review more of the questions or feel a Roth Conversion may be appropriate for you, do not hesitate to give us a call.

Here is a useful article from CNBC on Roth Conversions in down markets.

Traditional IRA account owners have considerations to make before performing a Roth IRA conversion. These primarily include income tax consequences on the converted amount in the year of conversion, withdrawal limitations from a Roth IRA, and income limitations for future contributions to a Roth IRA. In addition, if you are required to take a required minimum distribution (RMD) in the year you convert, you must do so before converting to a Roth IRA.

Student Loan Forbearance

Are you or someone you know currently making federal student loan payments? In light of the COVID-19 pandemic, some welcome relief may be on the way.Thanks to the recent passage of the CARES Act, the U.S. Department of Education will allow you to temporarily halt your federal student loan payments from March 13, 2020 until September 30, 2020.1

What should you do next?

At this time, no action is necessary. As part of this relief initiative, all federal student loans will be placed in an administrative forbearance and automatic payments will be paused from March 13 to September 30, 2020.

What if I want to keep making payments?

It’s important to keep in mind that payments are still being accepted during this time period, but they won’t be automatic or required. Depending on your situation and goals, continuing to pay down your federal student loans may make sense, even during this challenging time.

What about the interest?

Good news! During this same time period, interest rates are being set to 0% on the following types of federal student loans:2

  • Defaulted and non-defaulted Direct Loans
  • Defaulted and non-defaulted FFEL Program loans
  • Federal Perkins Loans

Remember, if there’s anything we can do to help guide you through this uncertain time, please don't hesitate to reach out.


1. Ed.gov, 2020
2. Studentaid.gov, 2020

Risk Versus Uncertainty

Staying positive during uncertain times can be challenging. In this interview Senior Fellow, Arthur Brooks, from the Harvard Business School discusses how to do it, ways to remain happy and the long running debate between risk and uncertainty.

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