Rick Bloom Talks Money

Your Top Questions Answered

Episode Notes

In our second episode, Rick is back to answer some of your most common email questions. We start with a breakdown of stimulus checks, and how not to fall for the many scams that are out there!

Next, what does Rick see for the economy going forward? How has a lack of spending - and tax revenue - affected us?  Could higher taxes be on the way? And how does the rest of the world economy impact us? Rick is bullish on the future of the market and he explains why.

The new CARES Act has a number of provisions regarding retirement plans with regard to Required Minimum Distributions, hardship loans and more. Rick takes a look.

Here in Michigan, new insurance laws will soon take effect. Rick explains what options Michiganders will have - and some of the misconceptions about what we will save.

How can the stock market be up with unemployment so high? If you need money right now, what avenues should you look at first?

If you have a question for Rick Bloom, or feedback on the show, send him an email:

Rick@rickbloomtalksmoney.com

Resources: Bloom Asset Management Website: http://www.bloomassetmanagement.com/

Jennifer Bloom's Blog on the new Michigan auto insurance laws: http://blog.bloomassetmanagement.com/whats-the-deal-with-michigans-new-auto-insurance-law/

Episode Transcription

Rick Bloom Talks Money Episode 2 - New 2020 Rules and Insurance Laws

Welcome to Rick Bloom Talks Money. I'm Rick Bloom. I'm here to help you make better decisions with your money because I believe money looks better in your pocket than it does anywhere else. That's the goal. Make sure you keep more money in your pocket. 

Thank you so much for the emails that I've received from you.  The questions were wonderful and so what I'm doing today is looking at the common themes that you had questions on and try to answer those. And you can email me at Rick@rickbloomtalksmoney.com; that's Rick@rickbloomtalksmoney.com

Well we're still involved in our science fiction movie, which means that we're not out of this crisis yet.  Even though the economies are beginning to open up around the world and around the country, we still have to be on guard, which means don't let your guard down. Make sure you wear your masks and you protect yourself; keep your social distancing, it is important. It appears that we're out of this crisis, but we're not there yet. So, it's important that you still protect yourself. 

Probably the number one question I got over the last week has to do with the stimulus payment.  People are still confused about it, so I wanted to make sure you understand it. The money that you're getting from the government, and it could be upwards of $1,200 per person, what it really is, it's a credit on your 2020 tax return. Unlike when we've gotten stimulus payments in the past where it was really -- you're getting a refund, but you had to pay it back; it's nothing like that. You do not have to pay this money back. You do not have to report it when it comes down to the IRS.  It's your money, so that's what you have to keep in mind. 

Now also keep this in mind when it comes to the stimulus, it's based upon 2020 but they used your 2018 or 2019 return to make the initial computation.  So, let's say that in 2019 you made more money than you did in 2020 which resulted in less of a payment to you. What the government has said that then when you filed your 2020 return, they're going to pay you the rest of the stimulus money. You don't have to do anything.  In addition, if your 2020 income is higher and thus, you would not have been eligible for the stimulus payment, but you still received it, you don't have to pay it back.Don't let anyone tell you you have to pay that money back because you don't. 

Also, one of the problems with the stimulus is the number of people that are being scammed; it's incredible. Keep this in mind -- the government is not going to email you for information, they're not going to call you.   Do not link on a pop-up ad because the government doesn't do those.  All those ads that are talking about the stimulus are bogus and avoid them. If you have questions about where your stimulus payment is, go directly to the source, go to the IRS website. Do not link from an email, do not talk to anyone over the phone about it. What these people are doing, they're trying to scam you.  They get your social security number; they get other sensitive information; they can go to town. So, you don't have to do anything to get your stimulus payment; it's automatic. You are not going to have to report it on your 2020 return and you're not going to have to refund it if you get too much. So, keep that in mind when it comes to that stimulus.

As the economy is reopening, what are the concerns that I have and what should investors be aware of? Well, I have many concerns as the economy is scheduled to reopen and one of them is, and just keep this in mind, our economy, about 70 percent of it is based upon consumer spending. In other words, what you and I spend our money on.Well, no one knows at this point how consumer behavior is going to be affected by what we've gone through.  And so that's one of my concerns is that consumer behavior is going to change and that could have adverse effects on the economy. 

I'm also concerned about local and state governments. Local and state governments have taken a huge hit on their tax revenues. Think of us here in Michigan. How many people are unemployed, no longer paying state income taxes?  And because of that, I do believe that we're going to see higher taxes and that's going to take a toll on the economy as well. 

The global economy is also a concern. First of all, most of the countries around the world entered this crisis not nearly in as good a shape as we did. We went into the crisis, the United States economy, we were in great shape. Most economies around the world weren't that way.  So, the global economy is going to have some issues and the reality is we don't live in an American economy anymore; we live in a world economy.  And so, what happens around the world definitely affects us. Whether Europe is in a recession or no; it appears that they are, that's going to have an impact on us.Our global partners around the world are struggling just like us, and that's one of my major concerns. 

I'm also concerned about China and what the relationship of the Western world is going to be with China. China has been a bad actor for a number of years, but the reality is we've all been addicted to inexpensive goods coming out of China.  So, everyone's afraid to deal with China. I do believe that there's going to be a reckoning and that's going to have some complications. Keep in mind, China is the second largest economy in the world. So that's where some issues are. 

I’m also concerned with inflation. You know, the government is spending $2 trillion that potentially can have some inflationary effect.  And also closer to home, I’m concerned about the auto industry. You know, for those of us who live in Southeast Michigan, we know the importance of the auto industry, and unfortunately, I think we're going to see that the auto industry is going to take another hit and that's going to affect us in Southeast Michigan.

That being said, and there are a lot of concerns, I'm still pretty bullish on the U.S. economy. You know, I've always believed anyone who bets against the U.S. economy always loses. We're the most resilient economy in the world. We're not like any other economy.  So, I have no doubt we will get through this crisis and we will adjust.  That doesn't mean it's going to be easy. I don't necessarily believe that the recovery is going to be a V-shape, we're just going to bounce back. I think it's going to be a while, but I would tell you that the U.S. economy is going to bounce back, but it's not going to be easy; it's not going to be overnight; we're going to have some issues. 

As you know, in the new Cares Act, there were issues regarding hardship withdrawals from 401k plans and IRAs, and a number of people wanted to know who should take advantage of that. So first of all, let me just tell you that in general, I'm not a fan of taking out of your retirement accounts.  It is not something that I think people should do because that money is for retirement and retirement is sacred. However, there are some situations where you do have to take hardship withdrawals. 

And first, let me explain what the new law is, and it's important to keep in mind, this is not a loan. When you take a loan from your 401k plan, you pay interest and you have to repay the money.  That's not the case here. This is a distribution.  And what the new law says is you don't have to pay the 10 percent penalty if you take it out before 59½ and you limit it to $100,000 or less.  However, you still have to pay the taxes. One of the benefits is you can pay the taxes over three years.  You can pay them over 2020, 2021, and 2022.  And, in addition, if you are going to pay the loan back, you know, typically if you take money from an IRA a 401k and you, you have 60 days to pay the money back. Well, in this provision for this hardship, you have three years to pay it back. So particularly for people who are thinking that they need some short-term money, but they want to put it back, these hardship provisions can be very favorable.  And pretty much the rules regarding the hardship provision are pretty broad.  To qualify, you or your spouse or dependent had to be diagnosed with COVID-19 or you experienced some adverse financial consequence such as being laid off, your hours reduced, or even you lost your job. So pretty much most people are probably going to be able to qualify for it.But again, I think you have to think twice before you take money out of your retirement account.  Retirement accounts should be sacred, and they really should be the last money you touch. 

Now, one last note regarding the 401k withdrawals is even though the law authorizes it, that doesn't mean that your employer will.  Your employer has to adopt these new rules. And right now, what I've seen, probably less than half have done that so far.  So, if you're thinking of taking a hardship withdrawal from your 401k, you certainly want to talk to your employer to make sure they adopt that provision within their 401k plan.

As many of you know, minimum required distributions are not required in 2020.  You know that the way the law used to be, when you turn 70½ you have to start taking money out of your retirement accounts.  That's been changed to 72.  However, this year, 2020 you do not have to take a minimum required distribution.  And the questions that I've got is who should take a minimum required distribution? Well, one, I think that if you're using that to cover your income needs, it's probably still a good idea in order to cover your living expenses that you take a distribution.  Also, if you are going to be in a lower tax bracket this year than next year, it may pay to take a distribution, so you pay taxes at a much lower rate. 

In addition, there's another strategy that you may want to consider. You typically cannot convert your minimum required distribution into a Roth IRA. You can convert anything above and beyond that, but you cannot convert your minimum required distribution into a Roth IRA. However, since there's no minimum required distributions in 2020, you can convert that money into a Roth IRA. So, for people who haven't been able to get money into a Roth IRA, this can be a very good strategy. And the benefit of the Roth IRA is that money grows on a tax-free basis and it is not subject to the 72 rules.Which means that you can let that money grow tax free for as long as you want.  You never have to take a distribution.  And in addition, if you pass, when your beneficiaries inherit that, they do not have to pay the income tax on that money. Typically, if you have an IRA and you pass away, whoever is the beneficiary of that is eventually going to have to pay income taxes on that amount.  In a Roth IRA you never have to pay the income taxes.  So I think this could be a great opportunity for people that traditionally have taken minimum required distributions and don't need the money to look at getting into a Roth IRA and let that money grow on a tax-free basis.

Probably the question I get all the time from people, even when I go to the grocery stores and I run into people, is they want to know what investments are safe.  They always tell me they don't want to lose money; what is a safe investment? And what I always tell them is it all depends upon your definition of safe. If you think about this, if someone says, you know, I got $50,000 to invest and I put it in a CD, at least it's safe. Well, it's safe if you're only looking at the principal, not purchasing power.  So safe is relative to the time frame you have for that investment. If someone was telling me they're investing money for a year or two, I would tell them, shop CD rates around the country, uh, that's your best investment. On the other hand, if someone says they're 10 years down the road, I don't want to be in CDs because that's not going to keep up with the increased cost of living.  So, there I probably want to have a stock investment, even for a conservative investor. 

It is so important as investors, we know our goals and objectives before we start investing money because risk is a function of time. What is aggressive for one year is not aggressive for 10 years. Most people, when they look at what safe is, they want to make sure that they can't lose the principal.  But that's a problem because if you're only looking at principal, you're not taking into consideration increased cost of living. And the example I always use when I was a kid, a postage stamp, was 4 cents. Well, today it's over 10 times that even though I'm mailing the same thing. So, when you look at safety, you don't look just that principal, you also have to look at purchasing power. 

I don't know if those of you know this, but in Michigan we're going to have a new insurance law on auto insurance and it's starting to get a lot of publicity. I've received a number of questions about it, so I thought I would, uh, explain it. And in fact, probably in the next few weeks, I'm going to get a guest on so we can go more in depth on what is happening with Michigan's new insurance law.

Basically, the major change deals with personal injury protection, PIP.  And what that is is basically, if you're in a car accident and you're injured, PIP provides you unlimited medical benefits and care for your life. There's no cap on it; it doesn't matter.  If you're disabled for 30 years, they're still going to pay you.  So, when they first did that in the 70s, you know healthcare wasn't a major issue. Well fast forward today, healthcare is a major issue. It's expensive, and Michigan has like the highest cost of auto insurance in the country. So, in order to bring that down, the governor and the state legislature passed this new law that allows you to adjust your PIP coverage.

Now you have options.In the old rules you had unlimited coverage; there were no options. Under the new rules, you can select the $500,000 coverage, a $250,000, there's one for $50,000, if you're enrolled in Medicaid there's another one, you can actually opt out if you have Medicare A and B. So, what that basically means, if you have $500,000 of PIP coverage, is if you're in a car accident, they'll pay you the first $500,000 of costs, and that could be for aids equipment, virtually anything.  After that, you go through your healthcare company, which may or may not provide you coverage.  And so you're going to have to decide based upon your individual situation what type of coverage you are selecting.

I think for most people, they're probably going to keep the unlimited because it does provide additional protection, but for some of you, you are going to want to adjust your PIP coverage. And what I would recommend, this is the time you talk to your agent, your auto insurance agent.  And it's also a time to make sure they know what they're talking about. You know, all too often, too many of these auto insurance agents, they send you the calendar every year and they're happy that's all they have to do. Well, no, you want to make sure that you have the right coverage, it's coordinated with your health care coverage, and that you understand the different options.  So you should talk to your auto insurance agent to go through which one best suits your situation.  But you should know that the major change deals with PIP, personal injury protection, and that you have options. I've seen these ads on TV, it says your auto insurance is going to go down 40 percent; that is not accurate.  What may go down 40 percent is your PIP coverage, not your entire auto insurance bill. So, if you have $250 in PIP coverage and you get a 10 percent reduction, that saves you $25 a year. So, it's not 10 percent on your total insurance, it's 10 percent just on the PIP coverage. It's important that you take this into consideration the next time that you renew your insurance coverage.

This law takes effect January 1st for any policies issued January 1st or after. So, if you have a policy you just renewed now, you're still on that coverage. But the next time you renew and if you're new after July, you're going to have to make that determination. And I would tell you it's a good idea to start talking to your agent now, so you make sure you have a game plan. 

Obviously, a lot of people rushed out of the market at the sign of the first crisis, and they've seen what's happened over the last month. We've had about a 30 percent increase in the market over the last four or five weeks. And so, the questions people are asking me, they’re saying, wait a minute, Rick, how could the stock market do so well when we still have these problems with high unemployment? Well, I think it's important to understand a little bit about the stock market. The stock market looks forward. It doesn't look in the rearview mirror. When we get unemployment numbers that is looking in the rearview mirror. So, when May's unemployment numbers come out that reflect what happened in April, those numbers are not going to be good, but that's in the rearview mirror. The stock market is always looking forward and they believe if you believe what the market is saying is that the future is bright, a much brighter than it is today. So, I think that's one of the reasons why you see the stock market doing better than the overall economy. 

 

Two, I think it's because of the Cares Act. There was a $2 trillion stimulus that is going to have an impact on the economy, and it certainly had an impact on Wall Street that the government was stepping up. Another reason, I think, was the Federal Reserve. The Federal Reserve has been very active during this time period to make sure that money is available for people to, and businesses to borrow.  If you remember in the financial crisis back in ’08 and ’09, one of the problems that we have is people couldn't borrow money; credit just froze up. Well, the Federal Reserve has been active and that has not been a problem. 

Some of the other factors I think that are helping the market right now is the fact that it appears that the virus has flattened, and I think that was one of the signs that people were looking to as to when things will improve.  Also, I think if you look at our hospitals, the fear a couple months ago was that hospital capacity was going to be filled up and that our healthcare system would collapse. That doesn't appear to be happening now. It appears that hospitals are under capacity, which is good news. So, I think when you factor all those things into consideration, you still see why the stock market has done well.

However, that doesn't mean that I think that it's all rosy in the future. I think that there's lots of stumbling blocks, there's lots of challenges that we're going to have to get through. So, the stock market, it reflects the future; maybe six months, maybe a year down the road. But it doesn't mean that we're not going to have some challenges and some volatility in the market.

Question is, people are hurting right now; where's the first place you should go to get money if you need it to cover your bills? Well, to me, as I mentioned this earlier, the last place is your retirement account. I think the first place you go if you need additional money right now is you go to your emergency fund.  That's why you've established your emergency fund is so you can draw down on times of need like today.  And one of the beauties of having an emergency fund that you keep it in a money market account is you can withdraw it without any problem. So that's the first place that I will withdraw from. 

The second place is I would withdraw it from non-retirement accounts.  If you have an account, a Vanguard, Fidelity, or Schwab, you should look at making adjustments in that account to pull the money out. And then of course, what you want to do is rebalance that account so moving forward it’s still invested the way that you think it should. 

I think that another place you can consider is to use retirement accounts to take advantage of the new hardship withdrawal.  And where that's nice is it you have three years to repay the money and you don't have to pay interest. So, for those of you who need money and you know that down the road, you'll be able to repay it, taking a hardship withdrawal makes sense.  And keep this in mind, even if you paid taxes in ‘20 and ‘21 and you repay the money in 2022, you can actually get a refund of the money that you would have paid in taxes.  Remember, if you do that with a traditional IRA or just out of the 401k, you only have a 60- day rollover period.  But if you use the hardship withdrawal, then you have a much longer time in order to pay the money back. 

To me, probably the worst place you could go to take money in terms of a crisis is to debt. I don't like the idea of taking personal loans because I think personal loans are too expensive and people get themselves in trouble on, and I certainly don't think it makes sense to take money from your charge card. You know, think about this, charge cards are 18½ percent non-tax deductible.  And so most people don't pay 18½, so they actually pay 20½ percent. So, it's important to keep that in mind, that those should be the last places you should go to get money. 

Well, I know we covered a lot of information today and it was certainly fun to be here with you and I want to remind you that in the future of all our podcasts, we're going to make sure that we take your questions.  So feel free to email me -- rick@rickbloomtalksmoney.com.  Every show we're going to take your questions. I want to remind you to check our blog at bloomassetmanagement.com.  We have lots of good information on the blog and it's free. Also, we have a blog going up by my niece, Jennifer, on the new changes in the Michigan insurance law, and it's important that you pick the right policy for yourself.

I also want to remind you that on our website there's also some other free things such as medical durable power of attorneys, something that is so important.  And I also want to remind you that you could sign up for my blast; we send out a weekly email. You can go on the website to get that information about how to sign up.

I'm looking at the clock and our time's just about up. I want to thank Jennifer and John behind the scenes for their help.  But most importantly, I want to thank you for the company. I enjoyed it. Hope you did too. We'll be back here making sure that you make better decisions with your money because I always believe money looks better in your pocket than it does anywhere else.

If you enjoyed today's podcast, you can subscribe for free wherever you get your podcasts. Bye now. 

This podcast is brought to you by Bloom Asset Management, building financial futures since 1984. Bloom Asset Management is a fee-only investment management and advice firm.  With its team of expert financial, legal, and tax professionals, you can be sure that Bloom Asset Management will be your long-term partner in building your financial future.