The CARES Act was passed to help average Americans through the Coronavirus crisis. It still takes good financial decision making to put this money in your pockets. Three common COVID money mistakes involve taking funds from retirement accounts. Avoiding these mistakes can help you save on taxes and keep your finances on track for the long run.
Don’t borrow from your retirement accounts.
The CARES act made it easier for participants in 401(k) plans to take loans from the plan. Taking a loan from a retirement account should be the last option you consider. The loan will need to be repaid with interest. Money you borrow from your retirement plan today won’t be working for you. Money that you withdraw or borrow today won’t be there when you need it in retirement.
Don’t take a hardship withdrawal from your 401(k) or IRA
Most withdrawals from retirement accounts before age 59 ½ are subject to a 10% tax penalty. The CARES act waives this penalty for certain withdrawals if you have suffered financial hardship because of the pandemic. Just because you can take an early withdrawal from your retirement plan does not mean it is a wise decision. Withdrawals are still subject to income taxes. You will also lose the benefit of long-term tax-deferred growth on the amount you withdraw. A retirement plan hardship withdrawal should be the last place you go for cash, and then only under dire circumstances.
Don’t take this year’s RMD unless you actually need the money.
The CARES act has a special perk for those who are already in retirement and are taking required minimum distributions. Retirees have the option to skip this year’s required minimum distribution. Skipping the required minimum distribution means you don’t have to pay taxes on that money until you withdraw it in the future. If you don’t need the cash today, allow it to continue to grow tax-deferred instead.
If you’ve already taken an RMD this year and want to undo it, there are ways to get the money back into your retirement plan and avoid taxes. Avoiding the tax may require some planning and will be easiest if done before July 15th. If you’ve already taken an RMD this year and want to reverse it, seek the advice of a CPA tax professional sooner rather than later.
Although the COVID-19 pandemic has created financial stress for many of us, long-term planning is still important. Before you tap into retirement funds, think about your financial plan. This means leaving retirement savings alone unless there is no other choice.
Matthew A Treskovich | CPA/PFS, CITP, CMA, CFP®, AEP®, MBA, CLU, ChFC, FLMI
Chief Investment Officer
We have all been in a position, at least once in our lives, which required us to trust someone with something very important to us, sometimes by choice, sometimes by necessity. Over the years, I have met many individuals and families who have had that trust broken a time or two. When this happens with a Financial Advisor, skepticism and mistrust can, unfortunately, keep people from taking much needed action with their financial goals.
If you are at a point in your financial life where you are tired of stressing over market performance, are stressed about what current events mean for your portfolio, or simply have financial matters that keep you up at night, then consider working with a financial advisor. Do not let the need for a financial advisor go unmet, due to any of the following myths.
Myth #1: I Don’t Have Enough Money to Work with a Financial Advisor.
This is the most cited reason why many individuals or families do not seek the advice from a Financial Advisor. While it is true that many advisors will have a minimum amount of investable assets that they require from potential clients, it is also true that many do not. Regardless of how much you have or think you may have; it is important to reach out to different advisors and start a conversation. Not every advisor has a minimum and many are willing to work with you to help you grow. There’s an advisor out there for everyone.
Myth #2: Financial Advisors are too Expensive.
We have all seen the movies where stockbrokers drive expensive cars, fly in private jets and vacation on luxury boats, dare I say: Wolf of Wallstreet? No wonder some folks are afraid of them! One of the major considerations when working with a financial advisor is both how much and how an advisor should be paid. Historically, advisors were stockbrokers and were paid on commissions. As the industry evolved, some financial advisors switched to an asset under management fee, where advisors are paid a fee based on the amount of assets they manage. Now, some advisors are paid on a retainer basis, or even a combination of these methods. While there are pros and cons to each method of payment or compensation, often clients are unsure of how their advisor is being paid. Never be afraid to ask a potential advisor, or your current advisor, how they are being paid and if they are required to put your best interests before their own.
Myth #3: I Can Reach My Goal without a Financial Advisor.
Absolutely, it is possible for you to reach your goal without a financial advisor but having an advisor can make a huge difference. Why? The simplest answer is that we are all emotionally attached to our finances. Many of us work for years trying to accumulate wealth and it isn’t always so clear what to do with that wealth when you’re emotionally tied to it. Having a trusted, fiduciary advisor to guide you through decisions or make recommendations can be a massive help, especially during stressful times. Additionally, sometimes our financial situations are extremely technical and could use someone professionally trained to make the right decision.
Anthony Corrao | CFP®
Simply put, a fiduciary is someone who has a legal obligation to put your interest ahead of their own. A fiduciary financial advisor is a financial advisor who is legally obligated to act in your best interest when providing financial advice. Now, if you are like most individuals, you are probably thinking “That makes a lot of sense. Don’t all advisors make recommendations in my best interest?” Sadly, the answer is… no, not at all.
Something that began to gain a lot of notoriety in the financial industry in the past few years has been the term fiduciary and what it means for advisors and their clients. In 2016, the Department of Labor tried to put in place a Fiduciary Rule. Ultimately, this rule was struck down by an appeals court, but the effects of its message continue to live on. One of the main effects of this rule that continues to live on was the divide between a fiduciary advisor and a non-fiduciary advisor.
Many financial advisors are not fiduciaries. Non-fiduciary advisors are held to a lower standard, the suitability standard. Suitability is a standard in which the advisor only needs to believe that a recommendation is merely suitable based on a client’s financial situation, not in their best interest. Again, if you are like most clients you may be thinking, “I want to do what is best for me, not something that is merely suitable. Why would my advisor recommend something that is suitable and not in my best interest?”
Often, the difference between suitable and your best interest for a non-fiduciary advisor is decided by how much the advisor can make. Consider a client and an advisor weighing two similar investments, one of which pays a higher commission than the other. A fiduciary would be legally bound to recommend the one with lower fees, avoiding the higher commissioned product. A nonfiduciary advisor doesn’t have too. A non-fiduciary advisor can recommend an investment or a product that pays them higher fees even though a less expensive option may exist. That is a massive conflict of interest. Suitability does not require an advisor to place your interest of their own, nor does it require the advisor to avoid such conflicts. Only fiduciary advisors are required to fully disclose all material information and avoid conflicts of interest.
Not all non-fiduciary advisors are bad guys that are out to charge you as much as possible, but it is important to understand, they are legally allowed to do so, and some do. At CPS Investment Advisors, we are fiduciary financial advisors. We do not use any investment products that charge commissions, we only charge a single transparent fee for management. When evaluating potential advisors ask them if they are a fiduciary. If the answer is anything other than yes, or if the advisor says, “We are fiduciary-like”, then run away. You expect your doctor to make recommendations with your best interest at heart, so why don’t you expect the same from your financial advisor?
Michael Scott | MBA, CFA
Senior Portfolio Analyst
The House and Senate recently passed new PPP legislation, The Payroll Protection Program Flexibility Act, signed into law by President Trump on June 5, 2020.
The Senate unanimously passed the legislation last Wednesday night (June 3rd) in a rush knowing that businesses still had until June 30th to apply for funds through the program. Below are some of the highlights for businesses to be aware of in regards to the PPP loan:
Payroll Expenditure Calculation
The requirement of using 75% of your PPP loan towards payroll and related expenses has been dropped to 60% with a cliff. If 60% of your loan is not used towards payroll, none of the loan will be forgiven. Remember that the other 40% must still be used towards the qualified expenses originally listed such as mortgage interest, rent or utilities.
Loan Period Extended
Formerly, the loan period to use these funds was 8 weeks from date of receipt or from the next available payroll. This period has now been extended to 24 weeks or until December 31, 2020; whichever comes first. This extension of time allows borrowers to adjust their employee workforce to pre-pandemic levels.
Also, business owners realize that some employees were making more in unemployment than when hired previously. If employees turned down good faith offers or if employers could not find enough qualified employees, the new legislation allows the borrow to adjust and exclude that information from the final calculation.
Payment Period Extension
Previously, PPP legislation was allowing a 2-year loan period at 1% interest. This period of payback has also been extended to five years. Existing PPP loans can also be extended if both parties agree on the new terms. Meet with your lender to find out.
Legislation can change very quickly, as we have absolutely seen during this economic crisis. It’s a great value to lean on your trusted advisor to stay on top of these changes to ensure you’re making the best choices for your business.
Derek M Oxford | CFP®, AEP®
The application to apply for loan forgiveness has been issued, and to further assist our clients and community members, we have compiled a list of common questions we have been receiving regarding the PPP loan. Please note, additional guidance is needed on several issues and the following information is not intended to be relied upon for official guidance. If you have specific questions regarding the PPP loan, or another financial related question, we invite you to contact our team at CPS Investment Advisors at: info@CPSInvest.com
- Question: Can the PPP funds be used to pay bonuses or increase salaries?
Answer: Perhaps yes, but further guidance is needed.
Covered payroll cost are currently listed as salary, wages, commissions, or tips (Capped at $100,000 on an annualized basis for each employee) Current guidance does not restrict an increase in salaries or bonuses, but keep in mind that each employee is still restricted to the $100,000 analyzation cap. (Capped at $15,384 per individual)
- Question: When does the 8-week (56 day) covered period start?
Answer: The date the lender makes the first disbursement of the PPP loan to the borrower.
The SBA answered this question in Question #20 of the PPP FAQ’s.
IMPORTANT: See question #9 (What is the “Alternative Payroll Covered Period”?) for an election to possibly adjust the start date.
- Question: Are the expenses used for forgiveness cash or accrual?
Answer: It’s a bit of a hybrid.
The loan forgiveness application specifies the following:
Eligible Payroll Cost: “Payroll costs incurred but not paid during the Borrower’s last pay period of the Covered Period (or Alternative Payroll Covered Period) are eligible for forgiveness if paid on or before the next regular payroll date.”
Eligible nonpayroll cost: “An eligible nonpayroll cost must be paid during the Covered Period or incurred during the Covered Period and paid on or before the next regular billing date, even if the billing date is after the Covered Period.”
- Question: If my rent increase, or if I’m renewing my lease agreement soon, will the new lease payment count toward loan forgiveness?
Answer: Not under current guidance. A leasing agreement must be in force before February 15, 2020.
CARES ACT SEC. 1106 (4) states,” the term ‘‘covered rent obligation’’ means rent obligated under a leasing agreement in force before February 15, 2020”
- Question: Can I contribute to my profit sharing plan (PSP) with PPP funds?
Answer: Further guidance is needed.
Currently, employer contributions to defined-benefit or defined-contribution plans are considered covered payroll cost. However, because PSP contributions are more discretionary, we caution the use of the funds into this type of plan until more guidance is provided.
- Question: What utilities can I use the PPP funds for?
Answer: Electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020. See the CARES ACT SEC. 1106 (5).
- Question: Will I get a tax deduction for the expenses paid with the PPP loan?
Answer: Not if the amounts used are forgiven.
The IRS provides more guidance in IRS Notice 2020-32 stating, “Specifically, this notice clarifies that no deduction is allowed under the Internal Revenue Code (Code) for an expense that is otherwise deductible if the payment of the expense results in forgiveness of a covered loan pursuant to section 1106(b) of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act)”
- Question: I have the PPP loan & EIDL loan. Can I keep and use them both?
Answer: In general yes, but the funds cannot be use for the same purpose.
Each loan has different restrictions regarding the use of the funds. Make sure you are using the funds in accordance with approved qualifying/covered cost.
- Question: What is the “Alternative Payroll Covered Period”?
Answer: You can elect to start the “8-week” covered period beginning the first pay period following their PPP Loan disbarment date.
The following is from the Loan Forgiveness Application:
“For administrative convenience, Borrowers with a biweekly (or more frequent) payroll schedule may elect to calculate eligible payroll costs using the eight-week (56-day) period that begins on the first day of their first pay period following their PPP Loan Disbursement Date (the “Alternative Payroll Covered Period”).”
- Question: A safe harbor exists for loans less than 2-million dollars. Am I still subject to review?
Answer: Yes, you are subject to review regarding loan forgiveness.
The $2 million safe harbor regards the “good faith” certification made by a borrower when they initially applied for the PPP loan.
The SBA addressed this on Question #46 of the FAQ’s on the SBA’s website:.
- Bonus Question: How long should I retain my records for loan forgiveness?
Answer: Six years after the loan is forgiven.
The following is from the Loan Forgiveness Application:
“The Borrower must retain all such documentation in its files for six years after the date the loan is forgiven or repaid in full, and permit authorized representatives of SBA, including representatives of its Office of the Inspector General, to access such files upon request.
If you have any additional questions, please contact our team. Our CPS Team is committed to helping both our clients and community get through these uncertain times. If you, or someone you know, needs assistance, please be sure to reach out. Our advisors are working around the clock to answer all your money questions: info@CPSInvest.com
Sterling J Searcy Jr | CPA
Senior Tax Advisor
The ongoing COVID-19 crisis has created hardships for many individuals and businesses. With many businesses and government offices closed, simple tasks like renewing a driver’s license have become much more complicated. The Federal and State governments, along with many local governments, have taken steps to make things easier by extending deadlines for several kinds of taxes and document filings.
Federal and State Taxes
The due date for filing 2019 federal income tax returns and making tax payments has been extended to July 15, 2020. There will be no additional interest or penalties assesses due to taking advantage of this 90-day relief provision, and no paperwork needs to be filed to qualify. The extension also applies to estimated tax payments for tax year 2020, which are normally due on April 15, 2020.
Although Florida does not levy state income tax on individuals, businesses are subject to income/franchise tax (CIT). In response to the crisis, the Florida Department of Revenue issued an emergency order that extends deadlines for certain CIT returns and payments, but the extension varies depending upon the business’s fiscal year. Some filing deadlines have also been extended for Sales and Use Tax for February and March reporting periods.
The REAL ID Act, passed by Congress in 2005, mandates minimum security requirements for state-issued driver’s licenses and identification cards. REAL ID-compliant identification, signified by a star in the upper right-hand corner, will be required in order to access federal facilities and board commercial aircraft. The deadline for the REAL ID act was originally set for October 1, 2020. Due to the COVID-19 crisis, the deadline has been extended to October 1, 2021.
Florida Driver’s License
The Florida Department of Highway Safety and Motor Vehicles has granted a 60-day extension for Florida driver’s licenses and State issued ID cards expiring March 16, 2020, through April 15, 2020, and a 30-day extension for those expiring April 16, 2020, through May 31, 2020. Additionally, the order extends through June 30, 2020, the effective period of commercial driver licenses with expiration dates on or after March 16, 2020.
Local Governments and Utilities
The Polk County Tax Collector has extended the deadline to pay 2019 delinquent real estate property taxes to 5:00 PM, June 12, 2020. Also, the City of Lakeland has extended deadlines for paying delinquent utility bills, and the City of Winter Haven has temporarily suspended service disconnects for non-payment. TECO has also temporarily suspended service disconnections for overdue bills as well as implementing a 20% rate decrease during the summer months for residential customers.
Rick Bernard | MBA
Deciding how to invest your savings is one of the most important decisions you will make. Fortunately, successful investing doesn’t need to be complicated. You can make good investment decisions if you understand a few simple concepts and have a financial plan. The two most important concepts investors need to understand are risk vs. reward and asset class diversification.
Risk vs Reward
Investment options range from “very safe” to “very risky”. Riskier investments usually offer the chance for higher returns over the long run. Riskier investments also have a greater possibility of loss. Academic research shows that the most effective way to invest is by blending assets of different risk levels. This process is called diversification and is a key part of building a high-quality investment portfolio.
The three major asset classes appropriate for most investors are stocks, bonds, and cash.
Cash is usually considered to be the safest option, along with debt obligations of the US Government, which are often referred to as “Treasuries”. Cash, and mutual funds that invest in cash equivalents like money market funds, have the lowest risk. These kinds of investments also provide lowest potential returns. Often the return on cash is not even enough to keep pace with inflation. Keeping too much cash in your investment portfolio can cause you to lose real purchasing power over time.
Investment grade municipal and corporate bonds have more risk but are still generally considered safe investments. Bonds represent the debt of a company. Bonds are also known as “fixed income” investments. When companies borrow money, they issue bonds. Investing in a bond is the same as loaning money to the company that issued the bond. Bond investors expect to earn interest on their investments, and to have the loan principal paid back at some point in the future. If the company that issued a bond has financial difficulties, they may be unable to make the promised principal and interest payments. This risk is called default risk or credit risk. Investing in a fixed income mutual fund instead of individual bonds can help protect against default risk. Bonds are usually less risky than stocks, but riskier than cash.
Stocks, often called “equities”, are riskier than bonds, but also offer the chance for higher returns over the long run. Stocks represent ownership of a company. When you own a stock, you own a small slice of that company. Some investors choose to buy individual stocks, while others buy mutual funds or exchange traded funds. When you invest in an equity fund, you own shares in the fund and the fund may own stocks. Stocks offer higher potential returns, but also come with more risk than investing in bonds or cash.
There are some kinds of financial instruments with much greater risk than stocks, such as derivatives, futures, and options. These high-risk instruments are not appropriate investments for the vast majority of individual investors.
Which Should You Choose?
The mix of stocks, bonds, and cash is also known as your “asset allocation”. A high-quality investment plan makes use of all three of these asset classes. The right asset allocation depends on factors such as your savings goals, your time horizon, and your risk tolerance. Your financial plan should incorporate all these factors. The right asset allocation is ultimately the one that best supports your financial plan and maximizes the probability of successfully achieving your financial goals.
Matthew A Treskovich | CPA/PFS, CITP, CMA, CFP®, AEP®, MBA, CLU, ChFC, FLMI
Chief Investment Officer