Looking for a few silver linings to the COVID-19 pandemic? The health and economic crisis has created some unusual financial planning opportunities you need to know about. Here is a quick round-up of some of the money moves you may only be able to make in 2020.
First, many parents save money for their children’s childcare or summer camp expenses in a Dependent Care Flexible Spending Account (DCFSA). With a DCFSA, you select how much money you want to set aside for dependent care expenses (think childcare, summer camps, adult daycare) during open enrollment. Typically, if you don’t use the money in your DCFSA in that year, you lose it. Poof, gone. With childcare facilities closed and many camps canceled, you may be wondering if that money saved in your DCFSA is lost.
Fortunately, the childcare center and camp closures are considered qualifying life events, specifically a “change in coverage.” This allows you to make a one-time change to your DCFSA contributions. Other qualifying life events include death, marriage, divorce, and the birth of a child. Consider how much money you will be spending on qualifying childcare expenses this year (it could be more or less). Then call your employee benefits department if you need to make a change.
Next, under the CARES Act, many federal student loans are under a temporary forbearance which allows borrowers to stop making payments without interest accruing until October 2020. Not all federal loans qualify. Some private lenders are allowing a forbearance on loans that don’t qualify, but the interest still accrues. Be careful, you don’t want to skip payments on a loan where the unpaid interest will be capitalized onto the principal at the end of the temporary forbearance.
If you are pursuing public student loan forgiveness, do not make a payment during this time. These months still count toward your 120 months. You do still need to certify your loan each year.
Confirm with your lender what they are offering. If you have extra cash flow because of this temporary forbearance, use that money to build up an emergency fund, pay down high-interest debt, save for retirement, or put it toward the principal of your student loans.
Third, the CARES Act suspended required minimum distributions from retirement accounts for 2020. If you don’t need the income from your IRA or inherited IRA, you do not have to take money out this year. This also makes qualified charitable contributions less attractive for 2020. Instead, consider gifting highly appreciated stock if you have some.
Fourth, consider making lemons out of lemonade by selling investments with a loss in your taxable brokerage account. These capital losses can be used to reduce capital gains and offset up to $3,000 in taxable income. Any unused losses can be carried forward into future tax years. If you are rebalancing your investments and trying to take some losses, watch out for tricky tax-code wash sale rules.
A wash sale is triggered when you sell or trade an investment thirty days before or after you sell an investment. If you do, the loss from the sale of the investment is disqualified. For example, dividend and interest payments that are automatically reinvested can prevent you from realizing a loss on the sale of an investment. Talk to a certified financial planner or CPA about your specific situation.
A final planning idea for you: If this is looking like a low-income year for you, it may be a good opportunity to execute a Roth conversion. A Roth conversion is when you take a pre-tax IRA and convert it to a Roth IRA which often generates taxable income in the year of the conversion but allows you the benefits of a Roth IRA down the road. Roth conversions are beyond the scope of this article, but reach out to a certified financial fiduciary planner to see how that might fit into your financial plan.
There is a lot on your plate right now. Implementing a few of these ideas might help you improve your financial situation in 2020 and beyond. Take care of yourself and your family so you can come out stronger on the other side.