Author: Summer Xia

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Maximize Health Insurance Benefits and Minimize Your Healthcare Spending in 2021

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After some heavy rain and low-40 degree days fall has finally come to Dallas. It signals the coming of holiday shopping, family gathering, end-of-year to do list and, annual enrollment. November is the month that health insurance for individuals and families sponsored by either government or many private employers are open for enrollment.

For people who will not have private insurance, the 2021 Open Enrollment Period starts from Sunday, November 1 and runs through Tuesday, December 15, 2020. You can go to HealthCare.gov to get information on what Health Insurance Market Place is and how it works. The website also let you browse and compare health plans available for 2021 enrollment. Starting in 2014, taxpayers with low to moderate annual incomes may be eligible for a Premium Tax Credit if they purchase health insurance coverage through the Health Insurance Market Place.

If your employer continues to sponsor group health insurance as an employee benefit, you probably have already received enrollment notice from your employer by now. Whether this is your first enrollment or your fifth or tenth time, you need to take some steps to ensure you and your family get the maximum benefits while minimize future costs.

Many medium to large private employers offer their employees a benefit program including a flexible spending account(FSA) under which the employee can elect a reduction in compensation and requests those dollars be allocated to the purchase of specific benefits. The benefits that can be provided include health insurance premiums and out-of-pocket payments such as co-pays, coinsurance payments, eyeglasses, and dental care. The maximum employee contribution to health FSA will be capped at $2,750 for 2021.

The election to contribute to employee FSA is made annually before the beginning of the year for which the election will be effective. The salary reductions used to fund specific benefits in the flexible spending account are not included in the employee’s gross income and are not treated as wages for Social Security taxes. If the money allocated to your health care flexible spending account is not used by the end of the year, it is forfeited. So, the first thing you need to do is to look back and review your family’s health related costs in 2020. Or better if you can look back two to three years and detect a spending pattern for your family’s medical expenses. Doing so gives you an idea of how much you have spent on family’s healthcare and where those dollars went. Then you can elect the amount of FSA salary reductions more aligned with your family’s circumstance. Some employers, however, allow their employees up until March 15th of the following year to spend funds in their FSA. So, be sure to check your FSA’s spending deadline with your employer’s human resource department.    

Next, review your current coverage and elections, and then consider the available plans to determine your needs for 2021. All employer-sponsored health plans are required by law to provide their employees the disclosure of important plan information, called The Summary Plan Description (SPD). The SPD contains important information such as how the plan operates, what benefits are provided, when an employee becomes eligible to participate in the plan and how to file a claim, etc. Another piece of document you can obtain from your employer is Summary of Benefits and Coverage (SBC). SBC helps you compare your coverage options across different types of plans.

Among the plans sponsored by your employers, there probably is a type of plan called high-deductible health plan. If you are financially able I would argue for enrolling in this type of plan to take advantage of Health Savings Account (HSA). HSA combines a high deductible health plan with a savings account. According to HealthCare.gov, for 2020, the IRS defines a high deductible health plan (HDHP) as any plan with a deductible of at least $1,400 for an individual or $2,800 for a family. An HDHP’s total yearly out-of-pocket expenses (including deductibles, co-payments, and coinsurance) cannot be more than $6,900 for an individual or $13,800 for a family. (This limit doesn’t apply to out-of-network services.) In addition, to be an eligible individual and qualify for an HSA, you are not enrolled in Medicare.

 HSAs have several tax advantages. One of them is that the contributions are an above-the-line deduction reducing adjusted gross income, so taxpayers do not need to itemize their tax deductions to benefit from HSA. Another advantage is that earnings on the contributions to an HSA are not taxed currently, and the distributions used to pay for qualifying medical expenses are tax-free. Qualified medical expenses include:

  • Medical expenses not reimbursed by health insurance policy
  • COBRA health insurance premiums
  • Long-term care premiums
  • Health insurance premiums if an individual is receiving unemployment compensation

The 2021 individual HSA contribution limit will be $3,600. The limit for family HSA contribution will be $7,200. If you will be 55 before the end of 2021, you can contribute an additional $1,000.

There is no doubt that healthcare related costs are staggering in the US. You will be amazed that even improving your health slightly can potentially lower your healthcare costs tremendously.

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Take Care of Your Health to Improve Your Wealth

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Part of a financial advisor’s job is to help clients manage the risks that could derail their financial plans or harm their financial well being. Healthcare planning is an important part of this risk management.

As generation X gets older their health is increasingly having more significance on their wealth. To older gen Xers, aging is potentially more detrimental to their wealth than stock market volatility.

According to a CDC report, 78% of US adults 55 and older have at least one chronic condition (Source: CDC/National Center for Health Statistics: National Health Interview Survey). If you are one of the gen Xers and have not started healthcare planning, now is a good time to start preparing for the unavoidable health issues later on.

When it comes to healthcare planning people usually thinks it is all about comparing and buying health insurance. In fact, health planning is a holistic process. It starts with an intentionally planned wellness regime that takes care of not only your physical well being but also your mental/emotional well being. Your wellness program needs to be reasonable, fitting your lifestyle and easy to stick with.

An integral part of your wellness plan is preventative care such as once a year physical examination. As people get older, health related expenses increase, too. Major medical bills are the leading cause for personal bankruptcy in US. It is more cost effective to prevent an illness than treating it. So, if you are 40 or older do not procrastinate on your annual physical.

What is more, the current pandemic also highlighted the fact that healthcare planning is a critical part of one’s risk management. The potential costs of a person hospitalized with coronavirus could be in the range of $21,936 to $38,755 if that person uses in-network service providers; if using out-of-network providers, the costs could be even higher, potentially costing you $42,486 to $74,310 (sources: FAIR Health). Therefore, it is urgent to identify in advance which in-network hospital will be your go-to hospital under your current health insurance plan.

If, unfortunately you have incurred coronavirus related medical bills, ask the health provider(s) to provide an itemized charge to make sure it does not have charges waived by CARES Act, such as diagnosing tests and co-payments. Alternatively, you can go to ahip.org/health-insurance-providers-respond-to-coronavirus-covid-19 to find out what health insurers are offering to consumers during the pandemic.

A comprehensive healthcare plan also includes a few important legal documents, such as power of attorney and medical advanced directive. If you have drafted these documents a while ago, now is the time to update them to reflect the current and changing situations.

Poor health undermines our ability to work, thus reducing our earnings potential. Poor health also hinders our ability to enjoy life. It is imperative that gen Xers start taking care of their health now to live a quality life down the road.

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College Application Amid the Coronavirus Pandemic

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This is the third installment of our series of articles on teen and money. These days, college application becomes more and more complicated and time-consuming. Not to speak that sending your child to college is no small task given the cost of higher education. Even worse is the coronavirus pandemic we are in right now raise not-before-seen uncertainties of college applications for high school seniors graduating spring 2021.

We know that 2020 is an unusual year for colleges and universities big or small, public or private. Amid the coronavirus pandemic, some schools are discounting tuition costs for various reasons. For example, Princeton University announced a 10% cut in tuition costs for the full year because students will only be allowed on campus for one semester or less. Others are cutting tuition costs in order to boost freshman enrollments. Therefore, parents need to do a little research if the colleges their teens are interested in have made or will make such move in terms of college costs.

In addition, several trends related to college application and admissions have emerged since the onset of this pandemic. According to some college application surveys taken after the pandemic starts students surveyed generally say they are less likely to attend schools far away from their homes. If this trend continues even after the pandemic is over, it could benefit the students who are willing to look outside their state borders and apply to schools a bit farther from their home state. Generally speaking, many colleges and universities are willing to give out some aid money to attract out-of-state students.

 Another trend emerged from the pandemic is more incoming fall 2020 students have asked colleges for a deferral because of limited college experiences due to remote learning. It was estimated by college application experts that among some elite universities approximately 10% to 15% of incoming freshman class would defer their enrollments. Could this mean more fierce competition among your student’s peers to get into their dream colleges or universities next year? The impact of the deferments on college admissions for 2021 applicants remained to be seen.

Unlike the past, the campus touring is drastically different this year. Some college campuses are closed for in-person learning and consequently these schools opt to offer only virtual campus tours. This alters the experiences parents and students get from what they get from traditional campus tours. Consequently, parents and students need to adjust their strategies to make the most of these virtual tours. One way to find out which schools offer virtual tour is to check with your student’s high school counselor.

Lastly, some previously scheduled standardized tests such as SAT and ACT got canceled due to health concerns. If your student is not happy about his or her test results taken before the pandemic, they need to coordinate the timing of their application with the next available SAT or ACT test they plan to take. You can go to collegeboard.com or ACT.org to check the test schedules.

All in all, parents and their high school senior students are facing a different college application landscape this fall. They need to adjust their strategies and tactics accordingly in order to achieve the best results.

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Raise a Financially Responsible Teen

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In our June article we talked about whether or not parents should allow their college aged children to have their own credit cards. This time we will continue our teen and money topic. As parents we want to raise financially responsible children. If our last article is geared toward older teens, in this one we will show parents a good way to allow their younger teens a real-life chance of managing their own money.

Have you thought about allowing your teens to have their own bank accounts? Some banks offer kids or teen checking/savings account designed for their young customers.

In our family, our two teenage daughters do some basic chores, not expecting getting paid. Purposefully, my husband and I asked them to do a few extra household chores in exchange for allowance money. They are getting paid twice a month. For this reason, my husband and I set higher standards of the quality of the job they do than the basic chores they are expected to do. At the same time, I opened teen savings account for them at a bank so that their “wage” goes to the bank accounts in their names. We also set up accounts for them at Mint.com, an online personal finance management website and linked their bank accounts with their Mint.com accounts.

Part of our strategies of teaching them financial responsibility is to give our daughters great freedom to spend their money however they want unless the purchases are explicitly banned by us. In the past, when they go out with friends to places, like mall, they would ask us for some money. Since having their own bank accounts, they don’t have to argue how much money they need to bring with them anymore. They can just take their bank debit cards with them and go.

As expected, during the first couple of months they managed their money poorly. They made a few big purchases and their bank accounts depleted quickly. Then, they have to wait for their next “pay” deposit even if they see something they really want to have. After a while they started to learn to budget and save for “big ticket” items. And they also learnt to postpone consumption so that they leave some money in the bank in case of “unexpected” needs. They are learning these essential personal finance management skills all by themselves without me or their dad to sit down and talk them into doing so.

One of the features of these teen bank accounts is that parent can be a co-owner. This allows parents to monitor and supervise while giving their teens freedom to manage their money. This should assuage concerns of some wary parents who want some control on their kids’ spending.

For interested parents, I will compare some essential features of the checking accounts three banks offer for their teen customers. If you do not bank with any of them, call your own bank and ask them if they offer such accounts.

  Bank
of
America 		Capital One Chase Bank
Teen Checking Account
and Interest Rates 		yes Yes
0.1%APY 		yes
Minimum to Open or Keep Call
to verify 		$0 Call
to verify
Monthly Fees $0
if under 24 		$0 $0
if under 18
Allow Parental Supervision yes yes yes
Debit Card yes yes yes

(Sources: official websites of BoA, Capital One Online Bank and Chase Bank)

The information in the table above gives you a glimpse of what the banking products for teens are out there. Don’t agonize about which one to choose, your goal is to let your teens learn to manage their money responsibly. Good luck!

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Should You Let Your College Kid(s) Have Their Own Credit Cards?

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Parents with college age children often face a dilemma: should we allow our kids to apply for a credit card of their own? If yes, what if they become irresponsible and rack up credit card debt? These are the legitimate concerns parents should have.

On one hand, young adults need to build their own credit history. With good, established credit history young adults could get favorable financial treatment when someday down the road they need to apply for loans to purchase a house or a car, or rent an apartment of their own. Therefore, it is beneficial for college students to have their own credit cards and build good credit scores by using them responsibly and pay the credit card companies in full and on time every month.

On the other hand, some of these students are still in their teen years, and the freedom of having a credit card to use is too tempting. It is not uncommon for college students to abuse credit cards and accumulate debts that they may hide from their parents, causing financial damages to themselves and their parents.

So, after stating the pros and cons of giving college students a credit card of their own, what can parents do?

This advisor thinks that there are several steps which parents can do to maximize the benefits of letting your college age kids have their own credit cards while minimize its potential financial harms.

As a parent, you need to start fostering good financial habits of your children early, specifically, the habits of budgeting and spending within their means. Talk to your teenage children about financial responsibility and the harm of abusing credit cards long before you allow them to have one.

If you are still not confident about your children’s ability to handle their personal finance, alternatively, during their freshman and sophomore years you can give them debit cards to use. That way, you can monitor their spending while teach them how to spend responsibly.

Another option of giving your college students a chance of building their credit history is for parents to add them as authorized users of parents’ credit cards. But, parents be aware, you are ultimately responsible if your children rack up large credit card debt. So parents need to think it through before adding your kids as authorized users.

If your kids demonstrate financial responsibility during his or her freshman and sophomore years in college, then you can decide if they can apply for their own credit cards in junior or senior year.

 One kind of credit cards students and parents may consider is so called secured credit cards. These cards can be ideal for college students who have no credit history or income. These cards are secured with a cash deposit, i.e. $300 or $500, from the card owner. Other than that, it works like a regular credit card. This kind of card is not a debit card. The cash deposit serves as a backup, not a payment for the card owner’s credit card bill. Students still need to pay their monthly credit card bill on time.

Ultimately, it is parents’ responsibility to know their children well and provide continuing guidance and supervision throughout their children’s college years in order for the kids to reap the benefits of building good credit history in college.

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Estate Planning for Gen X and Millennial in the Age of Coronavirus Pandemic

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For many in the generation X and millennial age groups they tend to have some misconceptions and procrastinate when it comes to estate planning.

The first misconception about estate planning gen X and millennial hold is that estate planning is for older folks. The second misconception is that estate planning is only about monetary assets; therefore, people with few financial assets need not to bother with it.

In fact, there is nothing further more from the truth than these misunderstandings. Estate planning is critical and beneficial for people old and young, and even more so in light of the current pandemic crisis we are in. Since the breakout of coronavirus pandemic some gen X and older millennial started to have sense of urgency and concerns about the lack of estate planning. They are concerned about what will happen to them and their family if they become seriously ill or worse.

So, what is estate planning? It involves using wills, trusts, insurance policies, and other legal documents to give instructions on what happens to your personal property, your tax, care of your young children and/or pets, your health care arrangements and final arrangements upon your death, etc.

As more and more states reopen after “lock down” people gradually venture out and ease back to “normal” life. Still, many people are cautious and avoid “non-essential” human interactions as much as possible.

Traditionally, in order for a will to be valid in Texas, a typewritten will must be signed by the person who makes the will and two witnesses must be in presence. In these difficult times, this requirement poses great challenges for many including gen X and millennial who have never had these estate planning documents in place and need to set them up right now. So, what can a gen X or millennial in need of an enforceable will do while observing social distancing?

Though in July of 2019 the Uniform Law Commission has approved the Uniform Electronic Wills Act, also known as the E-Wills Act, which allows probate courts to recognize electronic estate documents as being fully valid and enforceable, no state has enacted this law yet, unfortunately.

On April 8, 2020, Governor Abbott issued an order temporarily allowing regular notaries to notarize the following documents by video conference: durable powers of attorney, medical powers of attorney, directives to physicians, and self-proving affidavits for Wills.

The above order, however, does not eliminate the requirements for witnesses to be physically present. This suspension is in effect until terminated by the Office of the Governor or until the March 13, 2020 disaster declaration is lifted or expires.  Documents executed while this suspension is in effect, and in accordance with its terms, shall remain valid after the termination of this suspension.

Further more, according to the announcements published on the website of the Texas Secretary of State, the following conditions shall apply whenever this suspension is invoked:

  • A notary public shall verify the identity of a person signing a document at the time the signature is taken by using two-way video and audio conference technology.
  • A notary public may verify identity by personal knowledge of the signing person, or by analysis based on the signing person’s remote presentation of a government-issued identification credential, including a passport or driver’s license that contains the signature and a photograph of the person.
  • The signing person shall transmit by fax or electronic means a legible copy of the signed document to the notary public, who may notarize the transmitted copy and then transmit the notarized copy back to the signing person by fax or electronic means, at which point the notarization is valid.

Alternatively, a holograph will can be used in place of typewritten one in emergency situations. A holographic will is a handwritten will which is made by a person, or in legal term a testator, entirely in the testator’s own handwriting and signed and dated by the testator.  

Another valuable tool in a person’s estate planning repertoire is letter of intent. Letter of intent is not a legal document per se, but it is an invaluable piece of your estate planning documents. It usually complements a person’s will. As the name implies you can use this document to tell your loved ones what your assets are, where to locate them and how to access them, etc. You can specify your non financial wishes in this document as well.

Comparing with older people, gen X and millennial have relatively simpler estate planning needs, and the above planning techniques can be some of the options gen X and millennial utilize during these unprecedented times. After the society fully returns to its pre-pandemic way of life, gen X and millennial can revise and expand these documents with the aid of an advisor and/or lawyer.

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Everything You Need to Know About the Coronavirus Stimulus Payments

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As part of the economic stimulus package passed by the Congress under CARES (coronavirus aid, relief and economic security) act, individuals and small business owners can obtain crucial benefits to bridge them over until the economy starts recover. In this article, I will address the eligibility, application and other issues related to the one-time stimulus cash payments to Americans.

How much is the payment?

Individuals Each
Adult 		Child under 17 Married
couple
with
two kids
Dependent
17 and over
Amount $1200 $500 $3400 $0

Who qualify for the payments?

According to Wall Street Journal’s report the stimulus payments start “phasing out for those with income above $75,000 in adjusted gross income for individuals, $112,500 for heads of household (often single parents) and $150,000 for married couples. The payments start shrinking above those levels.” The payment will be reduced by $5 for every $100 over the above thresholds until it is completely phased out.

For those with no children, the benefits phase out completely at $99,000 for individuals and $198,000 for married couples.

Are green card holders eligible for the payments?

The answer is “yes” as long as you have a social security number and you meet the income qualifications for the payments.

Which AGI number to use?

The IRS will use 2019 tax returns to set the payment amounts and 2018 tax returns if 2019 tax returns isn’t available.

What about those who do not qualify for the stimulus payments now but lose substantial amount of income in 2020?

The good news is that the final amount of the benefits will be determined based on your 2020 income and settled on your 2020 tax return. So people may ultimately qualify for the stimulus money through a larger tax refund or smaller tax payment in 2021. And for those who eventually qualify for less money than they receive this year, the good news is that they do not need to pay back the extra money they got.

If I typically do not need to file income tax returns do I still get the payment?

Yes. According to IRS it will use the information on the Form SSA-1099 or Form RRB-1099 to generate Economic Impact Payments. Since the IRS would not have information regarding any dependents for these people, each person would receive $1,200 per person, without the additional amount for any dependents at this time. (Sources: Internal Revenue Services)

What about income taxes on these payments?

These payments are not considered taxable income; therefore, individuals do not pay income taxes on these payments.

How do I apply for the payment?

You do not need to apply for the payment. The IRS will send the payments either directly to your bank accounts that are on file with the IRS or by checks via mail based on the qualifications outlined above.

Can my child who was born in 2020 get a payment?

Unfortunately, parents of child who was born in 2020 will not get a payment for that child now. But, if the parents’ income dropped low enough in 2020 to qualify they will either get extra $500 to their tax refund or get the amount subtracted from their income-tax bill when they file their 2020 tax returns in 2021.

Can I receive the payment if I owe money to the IRS for prior years?

IRS will not deduct the money from your qualified payments even if you owe the IRS back taxes or other liabilities.

What about child support?

If you are behind payments for child support the payments may be smaller for you.

How soon will I get the payment?

According to Treasury Secretary Steven Mnuchin’s comments last Thursday the direct deposit stimulus payments would begin in two weeks. For those who will get the payments via checks the paper checks will not be mailed until mid-May.

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Coping with Coronavirus Crisis

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Since March 24, 2020 Collin County, Texas has officially implemented its seven-day shelter-in-place law. Even before this order, residents in North Texas have been coping with the crisis that has drastically changed their lives.

Historically significant news and data used to come in once in a while now have come in almost daily since the end of last February, causing global financial markets to swing up and down wildly. And the word “unprecedented” has been used many, many times to describe the simultaneous global health crisis and financial crisis.

The speed of interest rates dropping was unprecedented. “Unprecedented” is this time that investors flight to cash abandoning stocks and safe haven assets like US treasuries at the same time. The number of Americans filing for unemployment benefits skyrocketed to a record–breaking 3.283 million for the week ended March 21. Consensus expectations were for 1.64 million claims. The previous record was 695,000 claims filed the week ended October 2, 1982. We are indeed living in an unprecedented time.

Amid this historical backdrop the central banks, especially the Fed, had adopted extraordinary measures to fight the financial fallout caused by this health crisis. And the Congress had just passed an unprecedented 2.2 trillion rescue/stimulus bill to relive financial burdens off Americans’ shoulders.

Based on a report by the Wall Street Journal, the bill will provide one-time checks of $1,200 to Americans with adjusted gross income up to $75,000 for individuals and $150,000 for married couples. Individuals and couples are eligible for an additional $500 per child. The one-time payment will be reduced by $5 for each $100 of income over those thresholds, completely phasing out for individuals whose incomes exceed $99,000, $146,500 for head of households with one child, and $198,000 for joint filers who don’t have children.

If you have recently filed tax return and the IRS has your refund account information on file, you can expect the direct payment into your refund account as early as in three weeks. It will take much longer to receive the payments by checks. The income figures above are based on the adjusted gross income from the 2019 return, or if that return hasn’t been filed, the 2018 return, said Jeff Levine of Kitces.com and Buckingham Wealth.

According to the bill it expands unemployment insurance to cover freelance and gig workers. The current unemployment assistance will be increased by $600 a week for four months.

The bill also includes $350 billion in loans to small businesses that can be used to cover payroll expenses, rent, and interest on mortgage obligations.

The IRS has also taken some steps to relieve Americans’ tax burden. It has officially postponed the deadline for filing income tax returns of year 2019 by 90 days. The new deadline will be July 15, 2020. “All taxpayers and businesses will have this additional time to file and make payments without interest or penalties,” said Treasury Secretary Steven Mnuchin in a recent tweet.

In an article written by Ben Werschkul for Yahoo! Finance, the IRS announced that it “will generally not start new field, office and correspondence examinations” during this period (April 1-July 15). The agency also announced that field collection activities will be suspended from April 1 to July 15. Liens and levies will be suspended during this period, too. However, the IRS underlined “field revenue officers will continue to pursue high-income non-filers”.

As this crisis rages on, there has already been some debate of whether the eventual recovery will be V shaped or U shaped. Given the unique nature of this economic crisis, whether the recovery will be V shaped or U shaped will largely depend on the progress of the medical research on effective treatment/vaccine against coronavirus. If the medical breakthrough comes earlier we may see a V shaped recovery. If not, we may see a U shaped recovery. Another interesting point made by Robert Rodriguez, former CEO of First Pacific Advisors in a latest interview by ThinkAdvisor pointing to a stock market rebound in the shape of a “lower-case “v”, not a rocket ship capital “V” — because of factors such as stock buybacks by companies benefiting from the fiscal stimulus will be banned.

Others like Jeremy Siegel, professor of finance at Wharton School of Business echoed a call by some financial professionals of rethinking the traditional “gold stand” of “60/40” portfolio strategy. Last Wednesday during a market update webcast sponsored by WisdomTree Asset Management he argued for the “need to pivot to a 75/25” portfolio strategy from the traditional 60/40 strategy “because interest rates are going to stay lower.” His point is based on historical real return index data from January 1802 through December 2019 showing that the real return from stocks was 6.8%, 3.5% for bonds, 2.6% for bills, 0.6% for gold and -1.4% for the dollar.

As with crisis in the past, there are opportunities for investors amid the market rout. For one, with the recent market sell-off, you may have a smaller tax bill if you convert your traditional IRA assets into Roth IRA. However, you need to consult your financial advisor before the conversion as the move is non-reversible and potentially complicated. For another, there are some solid companies priced attractively after the recent broad-market sell-off. But, I agree with what Peter Mallouk, president and CEO of Creative Planning said in another ThinkAdvisor interview that some of the worst things investors could do include getting into an industry that doesn’t recover, like energy, or betting on a company that can’t recover.

In the meantime, how do we as individuals go about our daily lives? I would like to share my personal experience of living through the coronavirus crisis.

I try as much as I can to keep my family’s pre-crisis routine . While staying at home, resist making too many trips to the pantry, though it is easier said than done. I make sure everybody in the family stay healthy by taking multivitamin supplements besides eating healthy meals, exercising at least 30 minutes daily and sunbathing for 15 minutes whenever the sun comes out. I sip water throughout my waking time almost daily. Since we do not need to commute to school or work, it is easier for us to get plenty of sleep everyday, another boost for our immune systems. To beat the feeling of isolation we get in touch with our friends as much as possible. We also spray letters and packages with disinfecting spray and wash our hands thoroughly after handling.

As a parent I would like to point out that now is an opportunity to teach our kids life lessons and build characters such as resilience and patience. It is also an opportunity to show solidarity among our neighbors and communities. If we are unable to volunteer, we can donate to local charities such as North Texas Food Banks. For those of us who have pets, we will have more time spent with them. Maybe, half an hour of dedicated play with our pets will strengthen our bonds. If your dog likes being touched, a little massage would be nice, too.   

Last, I want to say that generations of human beings have gone through and prevailed over wars, pandemics and financial crisis. Scientists worldwide are racing towards creating vaccines against coronavirus. If history can be of any indication I am confident that we will pull out of this twin crisis, too. Most importantly, we will have gained invaluable lessons and be better prepared for the future.

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Making Sense of the Latest Market Rout

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Oh boy, what a (market) roller coaster ride we have been on this week! This is not the planned topic for my February blog post. But in light of what has been happening in the market since this past Monday, I felt like pitching in with my own two cents and try to make sense of this stock market “carnage”. Even if you are someone who doesn’t pay attention to stock market daily, you probably have learned the recent market rout that has been going on for the past four days here in the States and beyond. To give you a sense of how bad the sell-off is, let’s look at it in a historical perspective. “S&P drops 10% in six days, fastest correction in history,” says one online financial news website. “US stocks slide into correction, on track for the biggest weekly loss since 2008” says another well-known financial newspaper. Sensational headlines abound.

As I am writing this article on Friday morning, Dow lost another 1000 points at one point. Though no one knows for certain how soon this sell-off will end, plenty of venerable news sources point to the coronavirus outbreak as the major culprit of this adrenaline rush market sell-off. The news reporting about the coronavirus outbreak in China has been going on for over a month, and the market participants are well aware of this and seemed to have shrugged it off. Then, why, all of a sudden, the market seems to be panicking about this coronavirus outbreak? Just last week we had market record highs. Is the coronavirus outbreak the only reason that has caused this stock market stampede? This advisor does not think so. There had been flashing warning signs throughout 2019 already: twice inverted treasury yield curve; continuing decline of US manufacturing activities; the credit crunch in the repo market at the end of 2019, and US stock market valuation that well exceeded its historical average.  Given the US stock market’s gravity-defying stellar performance in as late as of January 2020, this late stage bull market needs great fundamentals to sustain such high valuation. In my December 2019 article titled “A Look into Year 2020”, I mentioned that there could be two potential disruptions to the world economy and market in 2020: disruption of world supply chain and US presidential election. What a coincidence that during the weekend right before Monday, February 24 market first plunge, news broke out that Italy and South Korea were hit hard by the rapid spread of coronavirus, which means the world supply chain could be disrupted even further. At the same time, America learned that Senator Bernie Sanders won the Nevada caucus, thus unofficially put him as Democrat’s front-runner for the party’s presidential nominee. All of a sudden, the market realized that the narrative has changed from business as usual to this could go even worse. 

What is happening right now taught us several things. One, there is no such thing as this time is different for the market. Two, fundamentals do matter. Three, bubbles will pop. Sound familiar? But, when irrational exuberance is abundant, people tend to think this time IS different, from Dutch tulip mania all the way to dot.com bubble and up until this recent longest run bull market. Another thing learned from this episode is that as global economies become greatly interlinked the world markets seemed to have synchronized sell-offs in the same intensity, diminishing the effectiveness of geographic diversification. This is why people flocked to the usual safe haven assets such as US treasuries, rapidly depressing the 10 year treasury yields.

Who will save the market out of this misery? As always all eyes are on the Fed. There have already been some speculations that Fed will probably cut rates three times this year. Fed had never explicitly stated that it would cut rates this year. However, Fed did hint it would take any action it needs to stabilize the US economy. Granted, stock market is not equal to economy. Still, Fed is closely monitoring the situation. According to Wall Street Journal, Federal Reserve Chairman Jerome Powell signaled Friday that the central bank was prepared to cut interest rates if needed. Ah, talking about the market’s reliably dependable ally. But, don’t forget that the stock bull market was fueled by last year’s Fed’s rate cuts as well as corporate tax cut. Also, don’t forget that the coronavirus outbreak is a health issue not a financial issue. What is worse, given central banks of major developed countries have already cut their benchmark rates so low before this market sell-off that rate cutting may have limited effects on the market and/or world economy. What about fiscal policy? President Trump’s administration just released a $4 trillion spending budget. A further fiscal stimulus will further aggregate the problem of record US deficit. So, if the US economy slips into recession, it will be in a difficult situation this time.

As an individual investor, you are probably searching for answers and trying to make sense of those giddy headline news. You may hear noises such as “sell all”, “buy the dip”, or “do nothing”. These can all make sense depending on individual situations. I think now one of the silver linings for individual investors is the strong US jobs market. It is a big contrast between this time and the financial crisis of 2008-2009 where the unemployment rate once reached 10%. I also agree with what Fed Chair Mr. Powell said in a statement released Friday afternoon: “The fundamentals of the U.S. economy remain strong. However, the coronavirus poses evolving risks to economic activity.” So, how can an investor ride out this market volatility? If you have been working with an advisor, I am sure you and your advisor have already hashed out a plan precisely for times like this. If you don’t have a formal plan, don’t panic. The market goes up and down. Volatility is part of the market. If you are antsy and feel like doing something, instead of guessing where the market bottom is, take a deep breath and do the following things. After you go through these steps, you will probably have an idea of what you need to do next. Here is the list:

  • Check if you have stashed away 3-6 months of your living expenses in a safe investment vehicle such as a savings account or money market fund. This is your emergency fund. If you don’t have one, then start by saving $5-$10 per day or more if you can afford to do so.
  • Check if you have adequate insurance for you and your family. The reason why you need to do this especially now is that if you don’t have adequate insurance, say, a large medical bill in the near future that is not covered by your health insurance could force you to sell some or all of your investments in a downward spiraling market.
  • Talk to your loved ones and together write down your family’s financial goals. Sort them into three groups: near, inter medium and long term goals. Then, estimate to your best knowledge the amount of funds each goal needs. Near term goal means it is happening within 2-3 years. Inter medium term goal means anywhere between 5-9 years. A long term goal means anything in 10 or more years. After you finish this step, you will pretty much have a ball park idea of how much money you need for near, far future and in between.   

If you still feel queasy about the current situation, talk to your advisor and address your concerns together. Remember for all the advice out there the ones appropriate for your friends or coworkers are not necessarily suitable for your situation; it all depends on your individual circumstances.

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The Secure Act and Your Early 2020 Financial To-do List

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What are your financial moves in year 2020? First, I think you need to start by checking out a legislation called the Setting Every Community Up for Retirement Enhancement (Secure) Act of 2019, which is effective on January 1, 2020. In this article, I will outline some of the key changes in the Act and how these changes may impact a person’s retirement, college and/or estate planning.

The following are some positive changes coming out of the Secure Act:

  • The Act allows families to pay for up to $10,000 in student loans tax free using the money in their 529 college savings plans.
  • The Act has pushed back the age that retirement plan participants need to take the required minimum distributions (RMD) from 701/2 to 72.
  • The Act encourages retirement plan sponsors to include annuity as an option in their plans by reducing plan sponsor’s liability if the insurer which sells annuity fails to meet its financial obligations.
  • The Act states that any employer who creates a 401(K) or SIMPLE IRA plan with automatic enrollment will get a maximum tax credit of $500 per year.
  • The Act also makes it easier for small businesses to set up 401(K) plans.

Now, on to some of the negative changes brought by the Secure Act:

  • The Act mandates that inherited IRAs for non-spouse beneficiaries must be distributed over 10 years.
  • The changes for the age that requires RMD from 701/2 to 72 creates confusions among individuals who attain age 701/2 in 2019 or 2020.

In order to minimize the confusion, the IRS issued Notice 2020-6 saying that the Secure Act did not change the required beginning date for IRA owners who attained age 701/2 prior to January 1, 2020. Given its significance, the first thing I suggest you to do is to learn more of this Secure Act and plan accordingly based on your individual situations.

Second, you need to know updated retirement and Health Savings Account contribution limits for 2020 and adjust your own contributions accordingly. According to the Internal Revenue Service the contribution limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan is increased from $19,000 to $19,500. The catch-up contribution limit for employees aged 50 and over who participate in these plans is increased from $6,000 to $6,500. The limitation regarding SIMPLE retirement accounts for 2020 is increased to $13,500.

Taxpayers can deduct contributions to a traditional IRA if they meet certain conditions. If during the year either the taxpayer or his or her spouse was covered by a retirement plan at work, the deduction may be reduced, or phased out, until it is eliminated, depending on filing status and income. (If neither the taxpayer nor his or her spouse is covered by a retirement plan at work, the phase-outs of the deduction do not apply.) Here are the phase-out ranges for 2020: 

  • For single taxpayers covered by a workplace retirement plan, the phase-out range is $65,000 to $75,000.
  • For married couples filing jointly, where the spouse making the IRA contribution is covered by a workplace retirement plan, the phase-out range is $104,000 to $124,000.
  • For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction is phased out if the couple’s income is between $196,000 and $206,000.
  • For a married individual filing a separate return who is covered by a workplace retirement plan, the phase-out range is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.

The limit on annual contributions to an IRA remains unchanged at $6,000. The additional catch-up contribution limit for individuals aged 50 and over remains at $1,000. The income phase-out range for taxpayers making contributions to a Roth IRA is $124,000 to $139,000 for singles and heads of household. For married couples filing jointly, the income phase-out range is $196,000 to $206,000.

The income limit for the Saver’s Credit (also known as the Retirement Savings Contributions Credit) for low- and moderate-income workers is $65,000 for married couples filing jointly; $48,750 for heads of household; and $32,500 for singles and married individuals filing separately.

Annual HSA contributions for 2020 for individuals with family coverage are increased from $7000 to $7100. Account holders ages 55 or older can contribute an additional $1,000. However, in order to qualify for the contribution, a person must be enrolled in one of employer sponsored HSA-qualified high deductible high premium health insurance plans.

In 2020, the annual exclusion for gift tax is still the first $15,000 of gifts to any individual.

(Sources: IRS publications)