Helicopter Money Consequences
Let’s not be too insensitive here, because many families will be forever affected by COVID-19. Families have lost loved ones, lost jobs and closed down businesses because of this crisis.
However, here in America we believe in Capitalism. Capitalism works best when it is left alone. We call this in economics the “Invisible Hand”. Adam Smith, the father of economics, explained that whenever the economy is manipulated, it can produce unpredictable dire consequences2. The federal government’s response is to provide certain relief, often in the form of “helicopter money” (fiscal and/or monetary stimulus) – but this relief comes with a price tag.
Let’s explore how you can offset the price tag that pay for this “free lunch”:
- Max out your Roth 401k. Many employers now offer a Roth 401k option that underutilized. You could take money out of your savings account, if that is an option for you, for living expenses and have your employer increase your payroll deduction; in essence you would be spending down your savings and putting more into your Roth 401(k). Once money is contributed to a Roth 401k option, you can utilize a stable value fund or bond fund for lower-risk investing. The max you can contribute to either a traditional 401k or Roth 401k is $19,500 per year or, if you are over the age 50, up to $26,0001. Now remember you can only contribute this total amount for both of your 401ks, traditional and Roth. For example, you can put $13,000 in your traditional 401k and only put $13,000 in your Roth 401k. Consider funding your Roth 401k with excess savings so that you will be converting taxable accounts overtime to tax free. Your money market account is a taxable accountfund that you have already paid taxes once on and as you earn interest you are paying taxes on the interest too. Avoid paying taxes twice.
- If you have already maxed out your 401k and Roth IRA and are looking for additional ways to save tax free, there is another great opportunity. Do not dismiss whole life insurance as an alternative tax-free savings tool. In addition to death benefits, whole life insurance can provide you a more stable return compared to having all your tax-free growth within stocks and bonds. However, do not expect hole ife insurance to compete with your stock market investments because it was never designed to do this. Life insurance companies pay interest based on the current interest rate environment, as this environment improves you should make even more interest. Set your expectations in line with other safer asset classes such as CDs and certain bond fund funds. When comparing investments, it is imperative to compare apples to apples.
- Consult with a financial advisor and CPA to help determine whether or not it is a good time for you to consider a Roth conversion. Today’s taxes are historically low compared to previous years. It may be a perfect time to pay taxes now on your qualified investments, which have never been taxed before, while taxes are low.
- Silent Tax
- As Ray Dalio says, you have to start with an understanding of what money really is3. Our money is a fiat currency, backed by the full faith and credit of the U.S. government. This basically means it is an IOU. That IOU has weight and power only because the federal government has the power and right to tax its citizens. Therefore, our dollar’s strength is on the back of its citizens and its tax paying powers. In periods of high unemployment, that equates to lower tax revenues because people are paying less in taxes. Plus, when our currency is devalued by monetary policy and other government stimulus tactics, it serves to devalue the IOU guarantee. How does this affect you? Unfortunately, it can affect retirees the worst because they may have to rely on safer investments for their retirement portfolio. Retirees who are risk averse will then have a new risk to be concerned about. We call it purchasing power risk. Over time, these low-yielding investments may not keep up with inflation. A retiree can begin with a large nest egg but, over the course of a few decades, that nest egg may be reduced to a small quail egg.
As a small business owner myself, my heart goes out to all my fellow business owners who struggle through crises like the current pandemic. However, it is our responsibility to give, save, prepare for crises, pay our debts, diversify and pay the taxes we owe
Investment advisory services offered only by duly registered individuals through AE Wealth Management, LLC (AEWM) and/or Swan Capital. AEWM and Swan Capital are not affiliated companies. Information and views expressed are those of the author and are believed to be reliable; however, neither Advisors Excel nor its representatives are responsible for the accuracy of the materials being presented. Information presented has not been verified and is not guaranteed. Investing involves risk, including the potential loss of principal. Any references to safety or lifetime income generally refer to fixed insurance products, never securities or investment products. Insurance and annuity product guarantees are backed by the financial strength and claims-paying ability of the issuing insurance company. Life insurance policies are contracts between your client and an insurance company. Life insurance guarantees rely on the financial strength and claims-paying ability of the issuing insurer. It’s important to remember that most life insurance policies are subject to medical underwriting, and in some cases, financial underwriting, and the costs of a life insurance policy, including premiums and cost of insurance charges, is dependent on your age and health at the time of application. Life insurance products contain fees, such as mortality and expense charges, and may contain restrictions, such as surrender charges. If properly structured, proceeds from life insurance are generally income tax free. 00616631