Kitces.com - Advancing Knowledge in Financial Planning

Using Coronavirus-Related Distributions To Reduce The Tax Impact Of Distributions From Retirement Accounts

May 6, 2020 07:06 am 7 Comments CATEGORY: Taxes

In response to the COVID-19 global pandemic, the US Senate passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act last month. A more than $2 trillion emergency fiscal stimulus package, the CARES Act was enacted to help ease the effects of the resulting economic damage caused by the pandemic by providing a wide range of provisions, including loans and tax credits, with the aim of helping individuals, businesses, healthcare entities, and state and local governments meet short-term cashflow demands. Among the many provisions provided by the CARES Act is the Coronavirus-Related Distribution for individuals affected by COVID-19.

Coronavirus-Related Distributions of up to $100,000 can be made from IRAs, employer-sponsored defined contribution plans, and/or employer-sponsored defined benefit plans in 2020 (and 2020 only) by a qualifying individual. Qualifying individuals are persons whose health or finances have been impacted by the coronavirus as described by the CARES Act. More specifically, individuals (or their spouses or dependents) who have been diagnosed with COVID-19 by a test approved by the Centers for Disease Control and Prevention are eligible, as well as individuals who have been financially impacted by COVID-19 because they have been quarantined, furloughed, laid off, or have had to reduce their work hours; unable to work due to lack of childcare; or are business owners who have had to close their business or reduce the number of business hours they can remain open. The Secretary of the Treasury may determine additional factors for eligibility, though no further factors have been established to date.

The $100,000 Coronavirus-Related Distribution limit is an aggregate amount for all 2020 Coronavirus-Related Distributions beginning January 1, 2020. While distributions from IRAs can be taken as long as the individual meets the requirements to take a distribution in the first place, current employees who are participants in employer-sponsored defined contribution and defined benefit plans won’t be able to take distributions if the plan does not allow participants to access their funds prior to separation from the company.

Current employees of a company participating in the employer’s defined contribution plan may be able to access plan money to take a Coronavirus-Related Distribution via a plan’s hardship or in-service distribution provision. Additionally, the CARES Act allows employers to amend their documents to make Coronavirus-Related Distributions their own distributable event, allowing any qualifying individuals to take such distributions at any time during 2020!

Distributions from defined benefit plans to current employees are more restricted, however, since hardship distributions are not allowed. Furthermore, while employers have the option to allow in-service withdrawals for participants age 59 ½ or older, employers do not have the option to amend their defined benefit plan to allow for Coronavirus-Related Distributions to be their own distributable event (as can be done with defined contribution plans). Accordingly, current employees who meet the requirements for Coronavirus-Related Distributions may only take a distribution from a defined benefit plan if their plan allows for in-service withdrawals, assuming they meet the age requirement for those plan withdrawals (no younger than 59 ½).

There are several potential benefits of Coronavirus-Related Distributions, including that they are exempt from the 10% early distribution penalty, income from the distribution (which must all be taken in 2020) can be reported as taxable income over three years, and repayments of the distribution can be made up to three years after the Coronavirus-Related Distribution was received. In addition, mandatory tax withholdings are not required for distributions from employer-sponsored retirement plans, and employers can amend defined contribution plans to permit participant withdrawals that would otherwise be prohibited.

Coronavirus-Related Distributions provide opportunities for advisors to help eligible clients with some alternative planning strategies. One such strategy can be used by clients who already took 2020 RMDs but who didn’t need to use the funds; they can designate the RMD as a Coronavirus-Related Distribution instead, as a means to return the unwanted RMD (as the CARES Act eliminated 2020 RMDs from IRAs and employer-sponsored defined contribution plans). Another strategy can be used by clients who may benefit from moving less-accessible funds in an employer-sponsored retirement plan into a more-accessible IRA (e.g., if a client believes they may be subject to limited cashflow in 2021 or later, having funds in their IRA may be much easier to access in subsequent years than funds in their 401(k) plan that only allowed for Coronavirus-Related Distributions to be taken in 2020).

Ultimately, the key point is that the CARES Act offers individuals whose health or financial situation is affected by COVID-19 some relief through Coronavirus-Related Distributions by potentially allowing them to more easily access retirement funds that may not have otherwise been accessible.

#FASuccess Ep 175: The Importance Of Family Dynamics To Make (Business) Time And Regain Control Of Work/Life Balance, with Travis Parry

May 5, 2020 07:03 am 1 Comment CATEGORY: Financial Advisor Success Podcast

Welcome back to the 175th episode of Financial Advisor Success Podcast!

My guest on today's podcast is Dr. Travis Parry. Travis is the founder of Make Time Institute, which helps business owners, including financial advisors, to regain control of their time and achieve better work-life balance. What's unique about Travis, though, is that he spent nearly a decade working as a financial advisor as well and living firsthand the challenges of balancing the demands of an advisory firm with the needs of his family and home life before going back to school to earn a Ph.D. in family relations and human development and to study what it really takes to achieve a better work-life balance.

In this episode, we talk in-depth about Travis' "Make Time" approach to creating better work-life balance by overcoming what he calls the three myths of time management. The first myth is that there isn't actually such a thing as achieving balance but instead, it's better to identify your goals and values and to ensure that your time is prioritized to align with them. Second, that the key to regaining control of time isn't about being more productive in the work that you do, but again, about learning to prioritize what is really the most important and impactful work you should be doing with your time every day and letting go of the rest. And third, why, in the long-term, the key as a business owner isn't about just investing in your own personal development as a leader in the business, but in what Travis calls couples’ development. Because the reality is that for any advisor with a spouse and children, personal development and habit change can only occur if your spouse is on board with the change and you can develop together as a couple.

We also talk about Travis's own journey through the advisory business. How he started out in a major life insurance firm to leverage the training and resources in working with small business owners, why he decided to transition to the independent channel in order to focus more of his work on helping small business owners with their time and broader businesses than just the traditional financial services products, how a combination of family tragedy and the financial crisis derailed his advisory firm, and the way those disruptions ultimately led him to find what has become his life's work.

And be certain to listen to the end, where Travis shares why an inability to evolve an advisor's own time management systems is often one of the biggest blocking points that prevent a firm from growing and scaling, why he thinks Maslow's hierarchy of working towards self-actualization is wrong and how family plays a crucial role, and how the recent disruptions of the coronavirus may, for many advisors, end out reinforcing the exact kind of restructuring of time and priorities that Travis advocates in the first place.

The Latest In Financial Advisor #FinTech (May 2020)

May 4, 2020 07:06 am 1 Comment CATEGORY: Technology & Advisor FinTech

Welcome to the May 2020 issue of the Latest News in Financial Advisor #FinTech – where we look at the big news, announcements, and underlying trends and developments that are emerging in the world of technology solutions for financial advisors and wealth management!

This month's edition kicks off with the news that FTV Capital (the PE firm that invested heavily into rapidly rising Riskalyze) has taken a majority stake in Docupace, which historically was a ‘document management’ system for advisory firms that had expanded into front-office new-client onboarding but now – with FTV’s capital – aims to expand into the messier (but more desperately needed) opportunities for back-office business process automation (for what remains a very paperwork-intensive industry even with the shift to digitally e-signed forms).

From there, the latest highlights also include a number of other interesting advisor technology announcements, including:

Pulse360 launches new note-taking solutions for advisors to capture client notes digitally in a client meeting and immediately thereafter queue templated follow-up messages to clients
Hidden Levers expands into financial planning software with a stress-test-based approach to modeling retirement projections
Edmond Walters launches new Apprise financial planning software platform for ultra-high-net-worth clientele
SmartAsset’s SmartAdvisor launches an extension of its lead generation service that will queue up a ‘Live Connection’ to a prospect directly by telephone
XY Planning Network launches a new compliance archiving solution for websites, emails, and a wider range of ‘next generation’ social media platforms like Instagram and Facebook Groups

Read the analysis about these announcements in this month's column, and a discussion of more trends in advisor technology, including eMoney partnering with Allianz to expand its capabilities to illustrate annuities in a decumulation plan, Orion launching a marketing automation tool to offer prospects Advizr’s financial planning modules, Schwab striking a deal for API-based direct feeds to account aggregators that should set an industry template for reducing how often links break, and serial AdvisorTech entrepreneur Steve Lockshin announcing his latest venture, an estate planning solution dubbed “Vanilla”.

And be certain to read to the end, where we have provided an update to our popular new “Financial Advisor FinTech Solutions Map” as well!

I hope you're continuing to find this column on financial advisor technology to be helpful! Please share your comments at the end and let me know what you think!

*And for #AdvisorTech companies who want to submit their tech announcements for consideration in future issues, please submit to [email protected]!

Weekend Reading for Financial Planners (May 2-3)

May 1, 2020 02:59 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" – this week's edition kicks off with a new industry study from Broadridge finding that the coronavirus pandemic is just further accelerating the industry's shift towards more holistic financial planning as a way to demonstrate and add value in the midst of the turbulent market environment (particularly amongst advisors under age 40).

Also in the news this week is a new study finding that nearly 1/3rd of consumers still don't understand how financial advisors are compensated (undermining their trust in working with an advisor) and that getting a clear understanding of how the advisor is paid is even more important than the actual payment mechanism itself (e.g., commissions, AUM fees, fee-for-service, etc.), a discussion of whether advisors should be cutting fees in the current environment (particularly for their clients facing their own difficult financial situations), and the opportunity for advisors to work with their more affluent clients to make distributions from donor-advised funds to help charities that are trying to serve those most in need right now but may be struggling in the current environment.

From there, we have several articles on behavioral finance and helping clients through difficult environments, including tips on how to handle calls from clients who want to go to cash, how to (and how not to) position your 'behavioral coaching' as a value to clients and prospects, recent research showing that the more familiar an investor is with a stock, the more rapidly they tend to trade it (and the worse the results tend to be), an overview of the legal defensibility of various risk tolerance software tools (where some are far more robust than others if the advisor even had to defend their use of the tool in court), tips on what to look for (and what to avoid) in finding a valid and reliable risk tolerance assessment tool, and some guidance on what conversations to have with clients now while markets are calmer (to prepare for the possibility that they could become much more volatile again before the recession is over).

We wrap up with three interesting articles, all around the theme of how the industry itself is changing: the first looks at how in the last (financial) crisis, it was the firms that reinvested the most for growth despite the scary environment that ended out having the most success in the decade that followed; the second looks at the evolving trends in the industry that were already underway but may be accelerated by the coronavirus pandemic; and the last, a send-off from the soon-to-be-retiring Mark Tibergien, explores what financial advisors and the industry at large can do to make ourselves even more valuable in the aftermath of the coronavirus pandemic and the decade to come!

Enjoy the 'light' reading!

How RIAs Can Determine If They Need To Disclose PPP Loans on ADV Part 2A

April 30, 2020 08:47 am 11 Comments CATEGORY: Practice Management

Last month, Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act, providing Americans with $2+ trillion of emergency fiscal stimulus funding in response to the economic damage caused by the Coronavirus pandemic. Part of the Act included the Paycheck Protection Program (PPP), which initially authorized up to $349 billion in forgivable loans intended to be used by small business owners to pay their employees during the crisis. However, the overwhelming demand for PPP loans depleted funds in a matter of just a few weeks, leading to an additional round of funding of $310B made available in late April 2020.

Accordingly, small business owners still have the opportunity to apply for funding, leaving many financial advisors faced with the decision over whether to apply for a PPP loan themselves. As while loans are intended for small businesses (with 500 or fewer employees) experiencing economic uncertainty resulting from COVID-19 who need the funding to continue business operations, advisors who receive loans also need to determine whether their loans are disclosable events.

For brokers regulated by FINRA, PPP loans are not considered disclosable events for purposes of Form U4 Question 14K, as FINRA determined that forgiveness of the PPP loan does not constitute a “compromise with creditors” because the potential for loan forgiveness is part of the original terms of the loan.

On the other hand, RIAs must disclose their PPP loans on Item 18 of the ADV Part 2A if the loan constitutes a “material fact” pertinent to the advisory relationship. In most cases, if PPP loans are used for the intended purposes of covering payroll expenses for persons performing primarily advisory functions, the loan would be considered a material fact relating to the advisory relationship. Accordingly, RIAs should be prepared to disclose their PPP loans on their ADVs.

However, while PPP loans should likely be disclosed in most circumstances, RIAs may be able to avoid such disclosure in limited situations. For example, a firm could try to avoid disclosure by claiming that the funds were obtained primarily due to the economic uncertainty posed by COVID-19, but not necessarily because they were “required”. This argument, however, may be difficult to make given the Small Business Administration’s requirement of certifying a PPP loan as necessary due to the current economic uncertainty cause by the COVID-19 crisis.

Another way that an RIA may be able to justify not disclosing receipt of a PPP loan on their ADV Part 2 would be by claiming that funding was used for the payroll of employees who were not directly involved in advisory functions (e.g., staff involved in marketing, events, receptionist duties).

Ultimately, the key point is that because RIA firms and brokers have different criteria for disclosure events, the requirements to disclose PPP loans are different for each. For brokers, the principal question is whether a compromise with a creditor has been made, whereas for RIAs the question is whether the event has a financial impact that materially (or potentially) impacts the ability to fulfill obligations to the client. As such, FINRA brokers are not required to disclose PPP loans on their U4 Forms (assuming they are used according to the original terms of the loan) but RIAs, regulated by the SEC, should lean heavily towards disclosing their PPP loans on Part 2A of their Form ADV.

Student Loan Interest Forbearance Planning Strategies Under The CARES Act

April 29, 2020 07:07 am 4 Comments CATEGORY: Debt & Liabilities

With the recent turmoil driven by the coronavirus pandemic, people across the country are faced with tremendous uncertainty about their financial situations. In response to the crisis, Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act, a $2 trillion emergency fiscal stimulus package, in order to offer much-needed relief for both individuals and business owners to meet their short-term cashflow demands. For borrowers of Federal student loans, in particular, Section 3513 of the CARES Act offers a full suspension of Federal student loan payments with no interest accrual on those loans through September 30, 2020.

In this guest post, Ryan Frailich – Founder of Deliberate Finances, a fee-only financial planning firm in New Orleans, Louisiana – breaks down the key features of this relief provision and how the suspension of payments plays into forgiveness plans. Additionally, he offers strategies that advisors can use to help their clients leverage available CARES Act relief benefits as they relate to their student loans.

For instance, clients with direct student loans and Federal Family Education Loans (FFELs) owned by the U.S. Education Department can take advantage of suspended payments during the relief period, with no action required from the borrower. Importantly, though, FFELs that are not owned by the Education Department do not qualify for relief under the CARES Act, nor do other types of privately serviced student loans. Additionally, borrowers can confirm that the interest rates on their eligible loan accounts are set at 0% throughout the relief period, during which time any unpaid interest on loans will not be capitalized.

Meanwhile, for borrowers in forgiveness programs in which the forgiven amounts will be considered tax-free income, such as the Public Service Loan Forgiveness (PSLF) program, the relief period during which payments are suspended will count for payment periods; accordingly, borrowers in such forgiveness programs should be encouraged to stop payments during the relief period. Some forgiveness-eligible loans that don’t offer tax-free forgiveness, like Income-Driven Repayment (IDR) plans, may pose more complex challenges about whether to pay during the relief payment period, and the best choices will largely depend on anticipated future income levels and whether any forgiveness will actually be pursued.

Other clients with unique student loan situations may also benefit from relief efforts. For example, borrowers with FFEL or Perkins Loans that are not owned by the U.S. Department of Education, which will not qualify for CARES Act relief, may be able to consolidate their loans into a Direct Loan, which will qualify for CARES Act relief. Clients who may be expecting a reduction in income might benefit from entering into an IDR plan, which, after the relief period, may potentially reduce their payments by substantial amounts. And finally, clients who have stable income levels not impacted by the crisis and with no high-interest debt might be better off not taking advantage of the option to suspend payments, and may instead benefit more by making regular payments as usual in order to reduce their principal loan balances as quickly as possible (still taking advantage of interest rates while they are set at 0% during the relief period).

Ultimately, the key point is that the relief provided by the CARES Act for student loan borrowers is yet another way advisors can help their clients cope with the current crisis. Especially in light of the rapidly changing legislation, clients will need their advisors to help them determine if their loan payments are eligible for suspension, how loans that do not qualify for relief can best be managed, and how the rules may impact those in more complex financial circumstances.