When do I have to pay the tax on my stimulus check?

There are a lot of questions related to receiving a stimulus check provided by the Government during this pandemic. Many taxpayers think they have to pay tax on the stimulus they received, the opposite is actually the truth.
You don’t have to pay your stimulus check back to the government, and it will not reduce your tax refund for the year. The stimulus check is a new federal tax credit available in 2020 that the government has decided to give people now to help them through the pandemic and the recession. Tax credits provide a dollar-for-dollar reduction of your tax liability for the year, resulting in either a smaller tax bill or a larger tax refund.
So take a breath, and don’t worry about having to pay tax on this check.

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2020 is sounding a lot like 2009 to kids.

We felt the effects of the 2008 market crash all throughout 2009, I spent a lot of time telling my daughter no. I felt bad, she was in her first year of college and we felt the economic downturn big time. Every penny had to be watched, there was nothing for extras. 2020 is feeling the same after some many moths of dealing with this pandemic. Here are a few tips on how to talk to your kids during this unusual economic time:
Remain calm. “Staying calm is everything,” said Stervinou. “A child will innately think it’s their fault when you talk to them about money problems. Don’t put that on them.” Calmly explain the situation in a way that lets your kids know that you are in charge and you can handle it — whether you feel that way or not.
Answer in an age-appropriate way. A seven-year-old has no interest in IRAs or what the economic downturn has done to your balance. He or she wants to know why they can’t have a new pair of shoes.
Keep it simple. Say something like, “Mom and Dad are not working right now because of the virus. We’re being careful with our checking account and will not be spending as much as we normally do.”

We survived 2009, with care of spending, we can survive 2020.

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Just because you can do this, doesn’t mean you should.

As part of the CARES Act, Congress approved a change to let people withdraw up to $100,000 from their 401(k) or IRA accounts this year without having to pay the typical 10% penalty for people under the age of 59½. The move was designed to help people weather the economic impacts of the Covid-19 crisis.
Some people are looking at taking advantage of this penalty waiver to pull funds from their qualified accounts to invest outside of that umbrella in riskier securities. Many investors are trying to cash in on the industries and companies that have suffered from the Covid crisis. Retirement savings are meant to be long term investments, not short term gambles. Remember that even though the penalty is waived, you will still have to pay income tax on the withdrawal.
Investing for your retirement should be the primary use of your 401(k) or IRA. Gamble with outside dollars.

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The match is just gravy.

Recently a client called to tell me their work schedule was cut back to 3 days a week and their company was no longer matching 40(k) contributions. My client wanted to know if they should stop contributing to the 401(k), and deposit to an IRA instead.
The combined income for my client & their spouse is too high for a deductible IRA under the rules if there is a company plan. I reminded my client that saving pre-tax through a 401(k) is the best way to save because whole dollars are being invested. Another point I made was that dollars will go to the IRS or their 401(k) account, I prefer that the deposit go to their account. The match is just gravy and should not deter from saving for retirement.

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I am not a huge fan of Roth IRA’s, but there may be an advantage right now

The Roth IRA has been around since 1997 with little change to its structure. I am not a fan because I feel that too many taxpayers are depositing to a Roth IRA with after tax dollars vs increasing their deposits to a pre-tax company plan. I also feel that there will be significant tax law changes once Congress looks at the billions of dollars that can be withdrawn from these account tax-free. However, due to the current market conditions reducing the value of Traditional IRA accounts, I may be swayed to change my mind.
Consider a Roth conversion. If your retirement savings are heavily invested in tax-deferred accounts, such as 401(k) s and IRAs, you may want to take advantage of their diminished value and convert to a Roth IRA. You’ll pay the taxes now instead of in retirement, and your tax bill will be based on the value of your account when you convert.
Let’s assume that you were planning to convert $100,000 in 2020 and that $100,000 is now worth just $70,000. Converting the lower amount will not only lead to a lower tax bill but also allow the $30,000 rebound, whenever it comes (based on historical performance which is not guaranteed, of course), to be tax-free. Keep in mind the funds have to be in the Roth for a minimum of 5 years to be withdrawn tax free.

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I finally got my hair cut!

Who ever thought that something as routine as a hair cut would be such a big deal? Last week, after four months, I finally was able to get my hair cut. It was a bit different, I had to wear a mask, as did my hairdresser, and there were very few customers in that salon, all well-spaced. Beyond getting my hair done, I was very happy to be able to spend money locally. As much as our lives are restricted right now, local businesses are the backbone of our communities. Small businesses are the first to step up with a coupon of discount when we are fundraising, we cannot forget their generosity.
Who knows when things will be back to normal, or if we will once again have to adopt a “new normal”. My advice is, if you can, spend locally.

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I have harped on this so many times – we all NEED this!

Everyone needs an emergency fund.

Financial experts have stressed the importance of emergency funds for some time. Why? Because a financial emergency is not a matter of “if” but “when.” Having an adequate emergency fund can get you through times when income is low or nonexistent. Those who had money set aside for an emergency are better able to weather this current storm. How much should you save? I recommend three to six months’ worth of living expenses, depending on how many are reliant on your income. A financial emergency will happen, and we must be prepared.
If what we have been going through this year does not make you believe you need an emergency fund, then I don’t know what will.

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A 2020 RMD question

Q: I am going to defer my 2020 RMD under the CARES Act, will I have to take a double RMD in 2021?

A: No you will not. The CARES Act waives RMD’s for 2020, in 2021 the RMD schedule will resume at the normal rates of withdrawal.

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Where is your VPN?

I cannot tell you how many people come into my office, log on to their phone and start pulling up all of their financial data. My first question to them is, “What VPN are you using?” They more times than not look at me puzzled.
A VPN (Virtual Private Network) is a simple piece of software that you can install on almost any device. It will protect your privacy, help you stay safe online, and grant you unrestricted access to the internet.
Most importantly, a VPN will encrypt your data and hide your IP address by creating a private tunnel through the internet.
A VPN allows you to:
Hide your IP address from the websites you visit
Encrypt your browsing traffic
Access geographically-restricted content
Stream or torrent content from other countries
Choose between multiple private server locations
Protect your data on public Wi-Fi networks
There are a number of quality VPN’s you can add to your phone at no cost – my preference is NORD VPN.
How can I help you plan for your future when you are leaving it for the whole world to grab? Protect yourself.

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It’s always been about spending.

You can have a huge income and all the money in the world, but how you spend it determines how much of it you keep. Over the years, I have discussed spending many times and it is extremely important to think about how you spend every dollar. Some of you may have been laid off, some of you may be working reduced hours, and some of you may not be impacted at all by Covid19. It has always been about how you spend – is something a need or a want? Can payment be deferred? If you have received a stimulus check, here are a few spending tips:
Shore Up Your Emergency Fund. Ideally, you should have at least three to six months’ worth of living expenses in a savings account. If you’re not there yet, your stimulus check is a good start.
Pay Off High-Interest Debt. If you’re carrying credit card debt, you’re probably paying upwards of 15%. You can free up a lot of cash by paying off those cards.
Save For Retirement. If you haven’t funded a Roth or traditional IRA for 2019, there’s still time to make a contribution that can lower your 2019 tax bill.

Please be smart during this trying time and be safe.

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