The year’s final quarter is an appropriate time to review and make adjustments to financial plans, and in 2020 that’s a particularly good idea. Front and center are changes enacted in the Setting Every Community Up for Retirement Enhancement (SECURE) Act and the Coronavirus Aid, Relief, and Economic Security (CARES) Act. That makes it especially important for executives, family business owners, and retirees to revisit their financial plan, including their investment strategies, before the end of the year.
Evan Anderson, Regional Wealth Planning Manager for Wells Fargo Private Bank, provides important actions to consider as 2020 comes to a close. Anderson also offers insight into potential investment opportunities stemming from this year’s major changes.
Everyone: Review your gifting—and your risk appetite
Check your charitable giving. The CARES Act allows an increased income tax deduction—up to 100% of adjusted gross income—for charitable contributions made this year, provided the contributions are made in cash and to public charities. The law also makes it possible to receive a larger income tax deduction than usual for certain charitable gifts, which had been limited to a percentage of the donor’s adjusted gross income, depending on the types of assets that are given. For those taxpayers who take the standard deduction, the CARES Act allows an above-the-line deduction for cash charitable contributions of up to $300.
Reassess your risk appetite. When taking the time to review plans and portfolios, Anderson asks investors how all that has transpired over the past year has impacted how they feel about risk and how their assets should be managed.
He poses questions such as these:
- How did one of the most accelerated market declines in history make you feel?
- How did you react to this volatility?
- Have your investment objectives changed?
- Do you have the risk appetite that you thought you had?
“Those are some of the questions I would want to talk to a client about as we adjust any plans for the future,” Anderson says.
Executives: Diversification and retirement planning
Diversify concentrated risks. It’s not unusual for executives to have concentrated positions in company stock. “In some cases, this is unavoidable because of holding requirements or restricted stock grants,” Anderson says. But a year-end review of those concentrated positions could uncover opportunities to diversify.
Review investments in qualified plans. Anderson says that a lot of corporate executives he works with have a significant amount of assets in qualified plans, such as 401(k)s. These plans should be reviewed along with your other investments to make sure your total portfolio is aligned with your goals. You should also review your beneficiary designations, especially in light of the new rules enacted in the SECURE Act.
Family business owners: Taxes and contingency plans
Discuss payroll taxes. Business owners and their tax advisors should discuss any need for a deferral or credit against payroll taxes for 2020, or refunds available for overpayment of estimated taxes. This year, Anderson says, there’s also an allowance for accelerated depreciation on certain qualified assets.
Take action on income taxes. A number of tax provisions included in the SECURE and CARES acts, Anderson says, could be especially important for business owners. He recommends meeting with a tax advisor to discuss specific actions you should consider taking.
Review contingency plans. Having a documented backup plan if leaders retire, leave the company, or pass away should be reviewed in light of all the changes we’ve seen in 2020. These are often drafted, then forgotten, Anderson says. “It’s important to review or create a contingency plan for the management team as well as for ownership.”
Retirees: Estate plans, retirement accounts, and cash flow
Complete your estate planning documents. Carefully review your documents and the provisions within your plan. Do they still match your wishes and align with your best interests? The pandemic has prompted many estate planners and advisors to encourage clients to create health care directives, if they haven’t already done so.
Know the new beneficiary rules. The SECURE Act changed the rules for people who inherit IRAs. Non-spouse individuals (with some exceptions) now must withdraw, or at least be taxed on, the full amount within 10 years. A tax advisor can offer guidance to help guide decisions about withdrawals.
Consider Roth IRA conversions. The potential for higher taxes in the future is leading some retirees to consider converting their retirement savings accounts to Roth IRAs. Anderson recommends discussing this with an advisor before taking any action. (This could also apply to those still in the workforce.)
Check your Required Minimum Distributions (RMDs). Under the CARES Act, required minimum distributions (RMDs) were waived for 2020 from IRAs and certain defined contribution plans. While the 2020 RMD is waived, depending on their specific needs, retirees who are over 70½ may want to consider whether taking the RMD or making a qualified charitable distribution (QCD) from their retirement account are options to discuss with a tax advisor.
Reevaluate your cash flow. Anderson advises retirees to carefully reevaluate their cash flow needs with their wealth advisor, since so much has changed this year. “The overall asset base should be reviewed to make sure they still have the cash flow that meets their objectives,” he says.