Increasing Your Return on Life.®

Frank Talk - 2nd Quarter Newsletter (2021)

Published: 06/29/2021

Table of Contents


Written by: Frank Fantozzi

Happy Summer, Clients and Friends!

What a difference a year makes! Paulette and I recently returned from a short vacation in the Florida Keys with our two grown daughters, Natalie and Nicole. This was a special trip to celebrate Natalie’s graduation from the University of Cincinnati and her upcoming move to Chicago to begin her career as an interior design architect. Normally, a getaway with family to relax and reconnect would not fall into the remarkable category, since this is something we have prioritized as a family for many years. However, the pandemic has made all of us take a closer look at the things we used to take for granted, especially the ability to gather with family and friends on a regular basis.

I hope you and your family are finding opportunities to reconnect in ways that are meaningful to you as states and businesses reopen, capacity requirements are dropped, and more people feel comfortable gathering safely. If we learned nothing else over the past year or so, it’s that technology, while helpful, will never fully replace our very basic human need to connect and socialize in person.

As we move into summer, the U.S. economy continues to recover remarkably fast, and the stock market remains near all-time highs. However, it’s important to keep in mind that a lot of the good news about the economy has already be priced into stock values. Many companies and businesses reopening at full capacity continue to have trouble finding workers, partially due to the need for skilled workers, as well as non-skilled workers choosing to temporarily remain on the sidelines due to government subsidies. In addition, higher inflation has many wondering whether this means the Federal Reserve is behind the curve and will need to quickly tighten monetary policy to stave off high inflation. Add into the mix expected higher taxes and more deficit spending from President Biden’s economic plans as just one more thing for investors to worry about. For more on these and other economic considerations, be sure to check out our Market & Economic Update below.

We remain grateful for the trust and confidence you continue to place in us. We look forward to seeing more of you in person in the months ahead and to continuing to serve your needs and the wealth and investment planning needs of the friends and associates you continue to refer to our talented and growing team.

What's In It for You?

At-a-glance guide to your 2nd Quarter 2021 Frank Talk newsletter:

  • News & Events
    • Recent Events
    • Upcoming Events
    • Your 2020-2021 Tax Planning Guide
    • Complimentary Second Opinion Service
    • Visit our Getting Frank Blog
  • Market & Economic Update

New & Events
Recent Events

What's the Secret to Keeping Clients for Life?

On March 25, 2021, PFS president and founder, Frank Fantozzi, CPA, MST, PFS, CDFA, AIF®, hosted a live, interactive Zoom event featuring internationally recognized sales expert and best-selling author, Hal Becker. Mr. Becker shared strategies for business leaders seeking to attract and retain clients for life, including:

  • The 3 rules of incredible customer service
  • What is a ‘creative opportunity’ and why do you want it?
  • The mistakes most companies make
  • Why you lose customers and how to get them back

Those attending had an opportunity to participate in a live Q&A session following Mr. Becker’s presentation. If you missed the live event, you can access the recorded webinar at the link below.

Feel free to forward this link to business owners in your network who may also benefit from this information:
Customer Service: How to Keep Clients for Life

Why are Negotiations Different for Women and How Can You Use This to Your Advantage?

On June 3, 2021, PFS Wealth Advisor, Amy Valentine, CFP®, CFA®, hosted an exclusive webinar event, Women and Negotiation Today, featuring guest speaker Lindsay Troxell, Senior Director, Knowledge Labs® Professional Development at Janus Henderson Investors. Participants learned about ways to further enhance their negotiation skills to capture more of the opportunities they seek, during this interactive event. If you weren’t able to join the event, you can click on the links below to access the recorded webinar and the presentation slides at your convenience.

Feel free to forward these links to colleagues or friends that you feel may benefit from this information, as well:
Access the recorded webinar now: Women and Negotiation Today
Access the presentation slides

Upcoming Events

Save the date for our next webinar, Get Your Medicare Questions Answered, on August 17th from 11:00 am – 12:00 pm.

When it comes to Medicare, you have multiple options:

  1. Original Medicare (Parts A & B)
  2. Medicare Advantage Plans
  3. Prescription Drug Plans
  4. Medicare Supplement Insurance (Medigap) Plans

Determining which options are right for you and when you can enroll or change plans can be confusing. Please join us, along with guest speaker, Rodika Koloda, Life & Health Advisor at Insurance Systems Group, to take the guesswork out of Medicare planning. You’ll get the facts about Medicare, as well as answers to all your questions, including how health and/or prescription drug coverage from a current or previous employer could affect your choices. Don’t miss out! Watch for an email providing webinar details and registration instructions.

Mark your calendar! Our 13th Annual Cleveland Economic Summit Will Take Place on Thursday, September 30, 2021
We look forward to welcoming you and your guest to our 13th Annual Cleveland Economic Summit on September 30th at the Cleveland Botanical Garden. As you may recall, last year’s event was held virtually due to COVID-19 restrictions. Watch for a “Save the Date” email reminder in the coming weeks, which will provide more information about the event, venue and speakers.

Tax Planning is an Integral Part of Financial Planning2020-2021 Tax Planning Guide

While it can be easy to forget about taxes after filing your return, managing your tax exposure throughout the year can help you keep more of what you earn now. To learn more: View or download your PFS 2020 - 2021 Tax Planning Guide now.

Reminder…Our Complimentary Second Opinion Service is Available to Your Family, Friends and Colleagues

Our complimentary Second Opinion Service continues to be well-received among the friends, family members and colleagues of our clients and associates. This valuable service provides the people you care about with an opportunity to benefit from the same expertise and guidance that you have come to expect as a valued client of Planned Financial Services.

In many cases, a second opinion will simply provide confirmation, and the confidence that those you care about are on track to fulfill their values and achieve their goals with their current financial provider or strategy. However, if needed, we are happy to suggest ways in which we can help, including recommending another provider if we are not a good fit for their needs. Either way, following a Discovery Meeting and Investment Plan Meeting with our experienced team, they will receive a Total Client Profile and a Personalized Financial Assessment of their current situation. To learn more about the Planned Financial Services Second Opinion Service, click here to access or download a full description of this service and the benefits it offers to the people you care about most.

Don’t Miss Out On the Topics That Are Important to You: Visit Our Getting Frank Blog

For timely information on the financial planning, business growth and investment topics that are meaningful to you, visit our Getting Frank Blog at Recent posts include:

COVID-19 and the Global Retirement Crisis: What does it mean for the U.S.?

5 Investment Considerations for Small Business Owners

Key Considerations as You Start Receiving Social Security Benefits

Plan to visit us weekly as we post new articles and opinions.

Market & Economic Update
Inflation has been on the rise, but there are good reasons to think it will be transitory

Investors are not as interested in what’s happening now as they are in what’s happening next. Meanwhile, the Federal Reserve (Fed) shared its views at the conclusion of its last policy meeting on Wednesday, June 16. And while the Fed’s position that inflation is likely to be transitory has become stronger, not weaker, Fed members have seemingly different opinions on the future path of monetary support.

Inflation has been on the rise. Everyone knows it and feels the impact with every purchase. The Consumer Price Index (CPI) spiked to 5.0% year over year in May, the most since 2008, while core CPI (excluding food energy) hit 3.8%, the highest since 1992. Inflation has been rising and the Fed is watching. How will markets react to any potential inflation over the next year?

We do know this: Markets will be looking forward, not backward. By the time something becomes a “thing,” a meme, or makes a magazine cover, market participants are often past it. Markets are no longer watching to see if inflation will spike. It already has. In fact, since the big upside surprise in the April inflation data, released May 12, many inflation-sensitive assets have been underperforming. Copper? Down. Lumber? Down. The 10-year Treasury yield? Down. Market-implied inflation rates? Down. Gold? Down.

At the conclusion of its last policy meeting on June 16, the Fed shared its view on what may be coming for inflation. In its updated forecasts, the Fed acknowledged it had missed on inflation expectations, upgrading its preferred core inflation forecast for 2021 from 2.2% all the way up to 3.0%. That’s a large jump, but that’s based on what’s behind us. The forecast for the same index in 2022 and 2023 scarcely moved, at 2.1% for both years.

Inflation is certainly still capable of coming in hotter than expected. The difference between now and earlier this year is that inflation expectations are already elevated. In order to see inflation assets really perk back up, we would probably need to see stronger signs that higher inflation may be persistent. To get a read on that, it may be better to look at prices that tend to be more stable. We know there are areas where we’re seeing extreme price moves, which is impacting broader measures of inflation. But what about prices that tend not to move? There is such a measure, developed by the Federal Reserve Bank of Atlanta, called sticky core inflation.

Unlike CPI and even core CPI, sticky core prices are not setting multi-decade or multi-year highs. Sticky core CPI is up 2.6% year over year. The last time it was that high was…2020. There are still some warning signs though. While you have to be careful annualizing monthly data because it multiplies small, potentially meaningless, moves, annualized sticky CPI in each of the last two months was over 4% and that hasn’t happened since 1992. But even sticky core CPI has had some price idiosyncrasies in the current environment. If you take just the median move of the CPI components, the middle change for any given month, 12-month price changes have actually been declining. And the last two months? Somewhat elevated but nothing special.

We’ll be watching both sticky core CPI and median CPI to help monitor the likelihood that inflation will become persistent. We do think inflation will be elevated over the rest of 2021—and possibly into 2022—before it really starts settling down, but that’s still consistent with inflation being transitory. And it may remain somewhat higher after that compared to the last cycle as deglobalization and a potentially weaker dollar offset some of the structural forces that we think will continue to weigh on inflation. If inflation does start to look more persistent, it will certainly be felt on Main Street. For Wall Street, the immediate fear wouldn’t be the inflation itself, but rather its ability to force the Fed’s hand and accelerate policy tightening. But, based on how markets have been responding recently, the Fed’s position that inflation is likely to be transitory has become stronger, not weaker.

Speaking Of The Fed

The Fed ended its two-day Federal Open Market Committee (FOMC) meeting last week and, as expected, there were no changes to its current interest-rate or bond-purchasing policies. However, signaling on the future path of short-term interest rates seemingly surprised markets because the number of Fed members who now expect interest-rate hikes in 2023 changed dramatically, relative to the last FOMC release. While an initial rate hike was once thought of as a 2024 event at the earliest, as seen in chart below, the majority of members now expect at least two quarter-point interest-rate hikes to take place in 2023. Additionally, seven members (out of 18) expect at least one rate hike in 2022. 

These “dot-plot” projections are not voted on—nor do they represent official policy, but they do show the divergent opinions by some of the committee members. In fact, the market may have interpreted the changing projections as a shift in the way some committee members are interpreting the Fed’s new Average Inflation Target (AIT) mandate. That some members think interest rates should move higher next year is a notable difference from what some Fed members have repeatedly said: that they want inflation to run above 2% for some time before they raise interest rates. 

What Do Hawks and Doves Have to do With Monetary Policy?

While Jerome Powell is the chairman of the FOMC and likely the most recognizable member, there are 18 other members within the committee (and also one vacant position). Anyone who has been part of a big group setting knows that getting everyone in total agreement is nearly a Sisyphean task. Since 2014, though, there has not been a single dissenting, recorded vote cast by any voting member. However, some recent public comments and the recently released dot-plot may show that not everyone is in total agreement with the direction of current monetary policy. For example, Dallas Fed President, Robert Kaplan, often thought of as one of the most hawkish members of the committee, has repeatedly stated that the Fed should start to reduce or even eliminate its purchases of mortgage securities “sooner rather than later.” Others on the committee, including Powell, continue to defend the mortgage purchases. While Kaplan is not a voting member, he does provide input into policy decisions. 

What does it mean to be “hawkish” or “dovish”? Hawkish Fed members are generally concerned about inflation first and want to start to tighten monetary policy through interest-rate increases and/or the tapering of bond purchases. Doves are those members who want to continue to provide accommodative monetary policy to support the economic recovery. Of the 19 current members, seven can be classified as dovish, eight as neutral, and four as reliably hawkish. Not all 19 current members are voting members. There are currently 11 voting members (there is one vacant voting position) and of those 11, five members are reliably dovish—including Chairman Powell and Vice Chair Richard Clarida—and six members are rated as neutral. So, given the tendencies of the group broadly, the likely cause of the negative initial reaction in the bond market last week is that so many participants now think raising interest rates should occur in 2023. That the overall committee may have become more hawkish is notable. The concern now is that the Fed may speed up the removal of accommodative monetary policy and react sooner than markets are anticipating.


Inflation has certainly been the word of the year. Consumers and investors have seen and felt the impact of inflation. But the structural headwinds that have kept inflationary pressures at bay for decades are still in place. We do think inflation will be elevated over the rest of 2021 and possibly into 2022 before it really starts settling down, but that’s still consistent with inflation being transitory. How the Fed reacts to the data will be interesting, though. We continue to watch closely the risk associated with the Fed acting out of concert with what markets are expecting. Over the next few weeks we’re likely to hear from a number of Fed officials, so we’ll get more clarity on how thinking has changed recently. As such, it will be important to see who on the committee has become more hawkish. If it’s actual voting members, then markets may start to get more concerned.

Closing Remarks

As market and economic conditions evolve in the weeks and months ahead, you can rely on your PFS team to continue to monitor and adjust our portfolios and keep you up to date on these and other developments. We also want to remind you that our office is open for clients who would like to meet in person. For those who prefer to meet virtually, we continue to use Zoom for virtual meetings, and are always available via phone. Just let us know how you prefer to meet, and we’ll make it happen!

We are always honored to help our clients’ friends and business associates take greater control of their future with guidance from the PFS team. We welcome and are grateful for the many introductions our clients continue to provide. If you, or someone you know, has questions or concerns about your personal investment strategy or business finances, please don’t hesitate to share information about our complimentary Second Opinion Service and reach out to your experienced team of wealth advisors at 440.740.0130.

Don’t forget to join or follow PFS on Twitter, LinkedIn, Facebook and YouTube.

Click here for a summary of the material changes made to our ADV Part 2A between April 2020 and March 2021.

To review our firm’s privacy policy, full ADV Part 2A Firm Brochure and ADV Part 2B Brochure Supplements, please visit our website at

You may also request copies of these current brochures by contacting Ashley Benton-Cooper at or 440.740.0130 ext. 231.

Real People. Real Answers. 

Health, Happiness, and Good Fortune,

Frank Fantozzi
President & Founder


This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.

References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.

The Standard & Poor’s 500 Index (S&P500) is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

S&P Energy Index: A market capitalization weighted index that tracks the performance of energy companies.

Some research was provided by LPL Financial, LLC, June 2021.  PFS nor LPL make no representation as to its completeness or accuracy.

Planned Financial Services, LPL Financial, Hal Becker,  Lindsay Troxell, Knowledge Labs®, Janus Henderson Investors, Rodika Koloda and Insurance Systems Group are all separate, unaffiliated entities.

Investment advice offered through Planned Financial Services, a Registered Investment Advisor.

Securities offered through LPL Financial, Member FINRA/SIPC.

Overdiversification Could Actually Hinder Your Investment Goals

Written by: Cynthia Yang

Diversify, diversify, diversify. If you know only a little about investing, you’ve almost certainly heard — perhaps more times than you’d care to — about the importance of building a diversified portfolio. But is it possible to overdiversify or spread your investment dollars too thin across asset types and industry sectors? In a word: Yes. But because diversification is a complicated concept and can be difficult to get right, you need a nuanced perspective.

Why we do it

Diversification is designed to reduce the impact of losses that you might experience when specific securities or asset classes, particular market sectors, or even the general market are struggling. While some investments or asset classes lag, others may perform well — or not as badly. Thus, diversification helps reduce overall portfolio risk and volatility.

But while diversification helps manage risk, it can never keep your portfolio fully protected from losses. For example, in times of financial crisis many investments or asset classes (including in some periods, both stocks and bonds) can move in tandem and punish even well-diversified portfolios. The bottom line: When you invest, there’s always a risk you’ll lose a significant portion of your original investment.

An overlooked risk

Although the risks of underdiversification are relatively clear, the risks of having too much diversification may initially be harder to see. But there are a couple of reasons why owning too many investments or investment types can work against your portfolio.

First, the more investments you have in your portfolio, the harder it can be to keep track of all of them. It’s more challenging to monitor each investment’s performance and understand when something fundamental has changed with individual stocks or mutual funds. Consequently, you may not know when it’s prudent to rebalance your portfolio or change your investment strategy to remain on target toward long-term financial goals.

Another potential risk of overdiversification is holding overlapping securities. The more individual investments you own, the greater the likelihood that you may not be as diversified as you think. For example, there’s a good chance that two small-company growth mutual funds own some of the same stocks. If you own both funds, you not only duplicate investment costs, but you also get greater exposure to certain stocks than you probably intended. Bigger positions can seem like an advantage if those stocks are doing well — but not if they stumble and make your portfolio more volatile.

Also consider multiple studies that have shown that, with a certain higher level of diversification, investment portfolios tend to produce consistently mediocre returns. This happens because, when you have a large number of holdings, the returns of the successful ones become diluted by the average-to-poor returns of the portfolio’s remaining investments. Meanwhile, you may be paying fees that aren’t justified by diluted returns.

Optimal number and type

To review, a portfolio of two stocks is less risky than a single-stock portfolio because performance problems with one security can be offset by the other security’s higher returns. But the opposite is also true. If a single stock performs well, a second stock can limit overall portfolio returns. The challenge for investors is to limit risk while encouraging returns.

What, aside from becoming an investment expert, can you do to assemble a balanced portfolio? Work with a financial professional. This professional can help identify the goals that are most important to you — for example, reaching a certain amount by the time you retire while reducing tax exposure — and build a portfolio that targets these goals.

3 Tips for Making Retirement Less Taxing

Written by: Amy Valentine

Recent retirees often are surprised by the size of their tax bills. As they soon learn, income taxes during retirement can be significant. However, with some planning, it’s possible to soften the blow. Here are three tips to consider implementing.

1. Create a bucket list

This isn’t the kind of bucket list that includes scaling mountains and writing a novel. Instead, you should estimate your cash flow needs in retirement and take inventory of your income sources, segregating them into one of three “buckets”:

  • Taxable — such as mutual funds, brokerage accounts and rental property income,
  • Tax-deferred — including traditional IRAs and 401(k) plans, and
  • Nontaxable — for example, Roth IRAs and Roth 401(k)s.

As you withdraw funds in retirement, carefully select from these buckets to maximize tax-efficiency. Some people tap their nontaxable and taxable buckets first to avoid paying taxes on withdrawals from tax-deferred accounts. But this approach can backfire by triggering hefty required minimum distributions (RMDs) once you reach age 72 (see tip number three).

To avoid this result, consider withdrawing tax-deferred funds until you reach the upper end of the 12% tax bracket ($81,050 for joint filers in 2021). This strategy generates modest current taxes while drawing down your tax-deferred accounts to minimize future RMDs. The next funding tier might come from brokerage accounts, which typically generate long-term capital gains taxed federally at between 15% and 23.8%. To maximize tax-free growth, withdrawals from nontaxable accounts should be delayed as long as possible.

2. Delay Social Security

You can begin receiving Social Security benefits as early as age 62 or as late as age 70, but unless you need the money sooner, it’s generally best to wait. For one thing, the longer you put it off, the higher your monthly benefit will be, giving you a substantial benefit as long as you or your spouse live long enough to offset the initial lost income. In addition, as much as 85% of your Social Security income is taxable, depending on your income level. So, for many people it makes sense to postpone the start of Social Security benefits until their taxable income is lower because they’ve stopped working.

On the other hand, you may expect your taxable income to increase in the future because, for example, you’ll need to take sizable RMDs from traditional IRAs or 401(k)s. In that case, it’s important to consider the impact of those RMDs on Social Security taxation when determining the right time to start receiving Social Security benefits.

3. Manage RMDs

Under current federal law, you’re required to begin distributions from traditional IRAs and employer-sponsored retirement accounts when you reach age 72. The RMD for a given year is calculated by dividing your account balance by the “distribution period.” Generally, this means your life expectancy under the government’s Uniform Lifetime Table. But if your spouse is more than 10 years younger than you, the distribution period is your joint and survivor life expectancy.

Because RMDs usually consist of ordinary income, they can generate significant taxes. But if you retire before age 70, you can use the period between retirement and the onset of Social Security benefits and RMDs (when you’ll likely be in a lower tax bracket). By taking distributions from traditional IRAs or 401(k)s during that time in amounts that won’t push you into a higher bracket, you can minimize taxes on those distributions and lower future RMDs.

Other strategies involve:

Employer-sponsored plans. You may be able to defer RMDs from your 401(k) plan. Some plans permit participants to postpone RMDs so long as they continue working (even part time) for the company that sponsors the plan.

Qualified charitable distributions (QCDs). If you’re charitably inclined, and at least age 72, you can kill two birds with one stone: A QCD allows you to transfer up to $100,000 per year tax-free directly from a traditional IRA to a qualified charity. There are several potential benefits: You can satisfy your charitable goals, reduce your IRA balance without tax consequences and, if you’re age 72 or older, QCDs can be applied toward some or all of your annual RMDs.

Roth IRAs. Another effective strategy is to execute a Roth IRA conversion, recognizing current taxable income while you’re in a lower tax bracket. Roth IRAs aren’t subject to RMDs (see “A window of opportunity” at x).

Get the timing right

Minimizing taxes in retirement is a delicate balancing act, requiring careful timing of distributions from various income sources. Work with a financial professional to develop a plan that addresses your goals and considers your situation — ideally before you retire.

Sidebar: A window of opportunity

If you have significant balances in one or more traditional IRAs, the window between retirement and age 70 or 72 can be an ideal time to convert some or all of these into Roth IRAs. Most or all of the amounts converted will be taxable as ordinary income. But completing the conversion while you’re in a lower tax bracket will keep taxes to a minimum.

To ensure that the conversion itself doesn’t push you into a higher tax bracket, you may need to do it in annual phases. For example, you could convert a portion of your IRA balance each year. Once the process is complete, you’ll essentially have converted taxable assets into nontaxable assets and reduced, or even eliminated, the need for future RMDs.

Are You Responsible for Your Parents' Nursing Home Expenses?

Written by: Andrew Hardy

Given the steep cost of nursing homes, planning for long-term care is critical — for you as well as your parents. One important question to consider is whether you could be financially responsible for your parents’ nursing home bills if they can’t afford to pay them. The answer is: It’s possible, but not likely.

Filial responsibility laws

More than half of the states have “filial responsibility” laws, under which adult children are responsible for their parents’ medical bills if their parents are unable to pay. These laws are rarely enforced, for several reasons. For one thing, nursing home expenses usually are covered by Medicare or Medicaid. Also, most filial responsibility laws require a court to consider the children’s ability to pay before imposing liability.

In rare cases, however, an adult child may be held responsible for his or her parents’ nursing home bills. This might be the case, for example, if a parent doesn’t yet qualify for Medicare and has just enough financial resources to be disqualified from Medicaid.

It’s also possible for Medicaid eligibility to be delayed by several months — or even years — if the applicant made certain gifts or other asset transfers within a five-year “look-back” period. Nursing homes may be able to seek payment from the adult children of a patient who has made such disqualifying asset transfers to them during the look-back period.

Estate recovery process

Even if you’re not directly responsible for your parents’ nursing home bills, you may end up contributing to their care indirectly through Medicaid’s estate recovery process. This allows Medicaid to recoup funds it spent on your parents’ care from their estates after they die, thus reducing the amount of your inheritance.

So, if your parents are receiving, or will soon receive, nursing home care and have limited funds, consult an attorney. Your legal advisor can help you determine whether you’re potentially responsible for their bills. An attorney can also look into whether your parents’ assets are exposed to the Medicaid estate recovery process and whether strategies are available to limit your liability.

So, You've Dipped Into Savings...What to do Next With Your Retirement Account

Written by: Brian Klecan

Tapping an IRA, 401(k) plan or other tax-deferred account to pay current expenses can derail your retirement savings plan. Therefore, it should be viewed as a last resort. Unfortunately, many people reached that point in 2020 or earlier this year due to COVID-19’s financial impact. If you withdrew or plan to withdraw tax-deferred savings as a result of financial hardship, you may need a strategy for getting your retirement plan back on track.

Eliminating penalties

To ease some of the pain, last year’s CARES Act eliminated early withdrawal penalties for people affected by COVID-19 who withdrew up to $100,000 in retirement savings in 2020. The act also provided that account owners can avoid income taxes on the amount withdrawn by returning it to the account within three years.

Retirement plan owners unable or unwilling to return the funds have the option of reporting the distribution, and paying applicable taxes, ratably over three years. And the Consolidated Appropriations Act, signed into law at the end of 2020, extended similar relief to certain non-COVID-19-related disasters, applicable to eligible distributions made on or after the date of the qualified disaster and before June 25, 2021.

Serious consequences

To get an idea of how early withdrawals can affect your retirement plan, consider this hypothetical example. At the beginning of 2020, Pete is 35 years old and has a $200,000 balance in his employer’s 401(k) plan. He contributes $1,000 per month to the plan and expects to retire in 30 years. If his account earned an average return of 7% per year, his balance would be approximately $2.7 million at retirement.

In April 2020, Pete’s wife, Alicia, is laid off as a result of the pandemic. In July 2020, Pete takes a $75,000 distribution from his 401(k) plan to help cover the family’s expenses while Alicia looks for work. He also stops contributing to his plan until July 2021. How does a $75,000 distribution and a year-long suspension of contributions affect Pete’s anticipated retirement balance? The combined action reduces it to $2.1 million — $600,000 less than his original projected balance.

Make up the loss

As you can see, taking an early distribution (even if it’s penalty free) from a tax-deferred account and suspending contributions can really set you back. So, what can you do to make up for the loss in expected retirement benefits? Ideally, you would return the distribution to the account within three years to avoid taxes, plus contribute some extra to make up for any contributions and earnings you missed during the period of financial hardship. If that’s not possible, think about increasing your monthly contributions by an amount that will enable you to achieve your original savings goal.

In Pete’s case, for example, if he’s unable to return the $75,000 distribution, he might still significantly reduce the tax by increasing monthly contributions from $1,000 to approximately $1,600 when they resume in July 2021. Increasing contributions also allows him to return $38,400 of the distribution within three years and avoid taxes on that amount. The remaining $36,600 could be included in taxable income at a rate of $12,200 per year. Pete won’t quite be back on track with his original goals, but if he keeps up the increased contributions, he can get there.

IRS refunds

If financial hardship forced you to take an early retirement plan distribution, you’re not necessarily doomed to a financially insecure retirement. Consider recontributing some or all of the distributed funds within three years or increasing your contributions to make up for lost time. Be sure to amend your tax return if you report distributions as taxable income and later return them to the account within the three-year period. The IRS will refund you. Contact us for advice on saving for retirement and minimizing taxes for your unique situation.

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