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Did You Get a Refund After Paying College Expenses with a 529 Plan?

College students and their families are pondering their next move with the changes in the higher educational landscape that are the result of Coronavirus-related campus closures. These are no small matters but while they grapple with whether to continue school or perhaps take a semester off, there are other issues to consider. Yahoo! Finance addresses one of these issues in “The Coronavirus-Caused 529 Plan Tax Risk You Can’t Ignore.” 

If you or the college student in your family, received a refund for tuition and/or room and board, and these fees were covered using money from a 529 College Savings Plan, you are at risk for having the IRS label these refunds as taxable since they are no longer being used for qualified educational expenses. Yahoo! Finance explains that the IRS may charge you 10% penalty plus “income taxes on a certain amount of the earnings portion of the distribution, but you wouldn’t have to pay taxes on the principal.”

The article advises:

“To avoid this risk, 529 plan account owners should consider recontributing refunded amounts into their accounts. The catch: This must be done within 60 days from the date the refund was issued.”

And this may be a tough call if you feel like you could really use that money right now as opposed to putting it back into your account. (If the money was spent immediately, then you have to prepare for a possible tax penalty.)

The article outlines the process you will need to follow to make sure the funds get placed back into the account correctly. However, you can call your Fee-Only financial advisor if you want assistance with this process. And if the money is already spent, you can still contact your financial planner for help with how you can get prepared for next tax season.

Basic Personal Finance Advice

Whether you think the pandemic has been a great equalizer or whether you think that it has exposed a lot of inequity, the current financial downturn has already or likely will challenge you in some way. How you manage through these challenges will depend in part on your money mindset. If you didn’t have great financial habits before, it is not too late to improve your money management and financial planning skills.

In “Personal Finance 101: 6 Things Everyone Should Know,” The Motley Fool offers basic advice for staying afloat. Here are a couple of things to consider:

You need an emergency fund you can access quickly. 

First, you need an emergency fund in place before you start to save for specific goals like a house or a college education. You need to be able to cover your current, daily expenses.

Some of us like to hide money from ourselves to we can’t spend it.  For example, people may put money into a CD that stays locked in for a certain amount of time or open an internet bank account that has a delay in transferring money. These are not good for emergency funds. You need money in an account that will allow immediate withdrawals should you find you have an emergency.

You’re better off saving for large purchases than borrowing.

It may take longer to save but you will spend less. Borrowing, be it via a loan or a credit card, will incur interest so will spend more than if you have saved the money. The article includes an example of how much it might cost in interest to put furniture on a credit card. We understand that you may not want to save all of the money it takes to buy a car or a home but for other purchases, try to save.

Reflecting on Mother’s Day and Changing Financial Circumstances

A Forbes article, “On Mother’s Day 2020, 4 Life Lessons to Learn From The Coronavirus” offered perspective in these interesting times. Mother’s Day has past but we are all still reflecting on the changes the pandemic has brought to our way of life (and still honoring mothers).

One thing we can do is “Appreciate That Each Person’s Experience is Different” since: “A mom who is a grocery store clerk or a frontline medical professional may find herself busier than ever… Or the small business she owns, or the restaurant where she works, may be experiencing a temporary (she hopes) decrease in demand for her services right now.”

That said, the article also advises not shying away from challenging conversations about finances. It is important to be sensitive to your situation as well as to those of your spouse or other family members who may live with you but you don’t want to ignore the need to “retool your family budget in response to changing circumstances.”

The conversation doesn’t have to be unpleasant and you can plan for it in advance rather than surprising your family with a budget talk.

This time at home is also a good opportunity to teach your children more about money management. They may be thinking about it anyway if they have access to the news media and hear messages about financial insecurity. Whether your family is trying trim expenses or you are able to be generous with donations, your children need to hear from you directly.

If you’re looking for help or guidance in managing your finances, you can talk to a Fee-Only financial planner before you sit down with family members to discuss a roadmap for your new financial reality. It may feel better to approach this topic with insight from a financial planning expert.

Cinco de Mayo: Marketing and Meaning

Photo by Heather Ford on Unsplash

Today is Cinco de Mayo and this holiday is an opportunity to look at marketing versus meaning.  Before the COVID-19 crisis people were especially looking forward to this year’s Cinco de Mayo because it also fell on the day of the week people like to call Taco Tuesday. Even with the need for social distancing, some people may still celebrate the day with tacos and other southwestern food and drink.

Yahoo! Finance observes, “ The 5th of May is a commemoration of the Mexican’s army improbable victory over the French army at the Battle of Puebla on May 5, 1862. The win was an unlikely one due to the fact that the French army was considered to be the strongest army in the world at the time…”

Contrary to what some people believe, Cinco de Mayo is not Mexico’s independence day and the holiday has significance for all of the Americas since it was the last time a European army invaded this continent.

Americans are happy to spend money and celebrate whether they know the history behind a holiday or not. Many marketing campaigns use your feelings to convince you to spend money.  Forbes recently published, “Every COVID-19 Commercial is Exactly The Same,” not to be overly critical of the creative teams behind these ads but to get them to avoid repetition.

We hope that you will think more critically about the products and services you buy, particularly if you are facing financial uncertainty. Do your research to find the meaning behind the marketing: some companies are more interested in your financial independence than others.

Members of the financial services sector are also getting the word out about how they can help you weather the current economic storm. A Fee-Only financial planner can offer unbiased advice without commission-related conflicts of interest.

Tips to Protect Your Retirement Savings Amid the COVID-19 Crisis

In “5 Strategies for Retirement Immunity  Despite the Coronavirus Crisis,” on Kiplinger.com, Evan T. Beach, CFP, AWMA offers tips for keep yourself on track.

Save Cash—If you are still working you can work on growing your rainy-day fund. While many people have already lost their jobs, many more may still find they are without employment  in the months to come as companies look for ways to cut costs even further. If you are fortunate enough to remain employed don’t rest on your laurels: increase your savings.

Consider a Roth Conversion—The article asks and answers. “Why would a global pandemic and the ensuing bear market make Roth conversions any more attractive? Because you pay taxes on the converted amount.” If your IRA has lost value with the current global financial upheaval, you will be pay less in taxes on the conversion. Then you can have time to recover the amount lost.

Sell Profitable Investments—It you are looking to your investments to cover expenses, the article suggests, “You should be selling the things that are doing well and allowing the things that aren’t some time to rebound.”

Early in the Kiplinger article, Beach writes that anyone who is within five years of retirement needs “…a written (even if digital) plan that shows how much you’ll have and where it will come from. The plan also must account for taxes and inflation.”

However, while some people can write a plan, they are finding themselves in a very tough spot right now and Beach also suggests they-

Think about Refinancing—If you are still employed but worried how long that will last, you can refinance while you still get a paycheck to lower your monthly expenses.

Meanwhile in “Should you with draw money from your retirement plan?,” Washington Post columnist Michelle Singletary tells people they should only withdraw retirement money as a last resort.

The Coronavirus Pandemic Has Made Some Women Even More Economically Vulnerable

We’ve discussed the gender pay gap and women’s overall economic vulnerability and all that was before we all had to meet the challenges of a worldwide pandemic. Many people have lost work due to the shuttering of the economy and according to CNBC, “Women May Take an Extra Hit from the Coronavirus Pandemic” because women “…are less able to weather that job loss without real harm because they are typically paid less than men in the same occupation.” And women who do find ways to get hired (either now or after orders to shelter in place are lifted) may find that they are going to be asked to work for less compensation than before.

What might this mean? Some women may be able to do the same kinds of work they’ve done in the past, even if they are paid less. Others may need to pivot in to other kinds of work.

It means our spending habits may need to change. Some people, in anticipation of a swift return to the way things were, may have spent money in ways they would not have otherwise. If this is you, consider how to reap the most benefit from what you have already purchased and adjust your budget for economic uncertainty.

You may be worried about having enough money to keep your household going right now. Someone else may be concerned that they won’t have enough money for retirement. We all have different concerns but the way forward is to do the best you can right now. If you need to call creditors and ask for grace, do that. If you need to spend some of your savings to cover current expenses, do that.

Although women are more economically vulnerable, women are also capable of finding ways to keep things going. And you can consult with a Fee-Only financial planner to form a plan for how you will stay afloat.

Estate Planning in the Time of Corona

The extra time being spent at home and an increased awareness of our vulnerability has led some people to think about estate planning as they are either sheltering in place or needing to keep their distance from people when going out. Others may be working in places where they have an increased risk to illness and realize that they have put their finances in order.

In “How to Get Your Estate Plane Done While Under Coronavirus Quarantine,”  Kiplinger.com observes:

“We have never had to deal with these unique estate planning, legal and health care planning issues before. At the same time, we have an unprecedented emergency creating the need for many to act in a quick manner.”

Even if your Fee-Only financial planner is available via phone and internet to advise you on estate planning documents, there are legal stipulations that you need to follow so your estate planning documents are considered valid.

For example, a revocable (or living) trust needs to be notarized but if you cannot find or meet with a notary (some notaries are mobile), you may be able to have your lawyer draw up specific affidavits that include language about the situation at the time of signing. Legislation to allow for documents to be notarized online is in the works but has not been completed or signed into law yet.

Depending on the laws in your state, you may be able to use a similar process of signing affidavits that mention the pandemic to get your will in order.

Overall, we don’t want you to get discouraged by new steps in the estate planning process. If you feel the nudge to do estate planning during this time, please look into how you can get it done. This is as good a time as any to figure out how to distribute your resources and put directives in place regarding your health care.

Federal Income Tax Filing Deadline Extended; Check Your State Deadline

In the wake of all that has happened because of the worldwide Covid-19 pandemic the federal government has extended the filing deadline for federal income taxes to July 15. If you have not already filed your federal income tax return, you have until that date to file. However, each state did not automatically do the same (in fact, there are a few states that do not collect state income tax at all.) You will need to verify what the deadline is for your state. USA Today is one source that provided a list of what is expected for residents of each state (and the District of Columbia) with regards to state income taxes.

The Motley Fool offered “3 Reasons to File Your Tax Return Now — and 1 Big Reason to Wait.” For the most part it is better to file your taxes as soon as possible so you do not have the stress of it hanging over your head for the entire tax season. If you know that you need your refund, you shouldn’t wait. You may also need to have your taxes filed to do things like apply for a home loan or apply for college financial aid. 

The one reason NOT to file your taxes sooner rather than later is “ If … you made much more in 2019 than you did in 2018 — then filing your 2019 return could actually prevent you from getting a coronavirus stimulus check.” And if you know that you could use a stimulus check, then you can wait until after the government has sent out a check based on your 2018 income. The Motley Fool notes that , “the federal government has explicitly said it expects taxpayers to be tricky in doing whatever they can to make sure they get their coronavirus money — and apparently, it’s fine with that.”

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