Three steps to retirement planning earlier than the tip of 2020
Despite the new challenges posed by COVID-19 in 2020, old-age provision remains a key component of financial security. Every retirement plan is deeply personal. It’s not just about saving money, cutting taxes, or having money for a lifetime – it’s about achieving goals and living with dignity for a lifetime.
Because of this individual aspect of old-age provision, there is no single solution. With the changing nature of 2020 and the passage of the CARES Act, a Covid-19 relief bill, there are several planning strategies you should consider before the year is up to better work towards your goals.
1. Required minimum distribution planning
If you’re familiar with retirement planning, this late 2020 planning tip might surprise you, as the CARES bill passed in March 2020 waived most of the minimum payout (RMD) requirements for the year. This means that for people over 72 years of age – the new RMD age introduced by the SECURE Act in 2019 – no minimum payout is required due to IRAs or defined contribution plans like 401 (k). Additionally, most inherited retirement accounts, such as IRAs and 401 (k) s, are not subject to RMDs for 2020. If you normally move your RMD to December of the year, you won’t be able to make distributions for the rest of the year.
This is where personalized planning comes in. For example, if you find yourself in a lower-than-usual tax bracket this year, you might consider withdrawing some money from your IRA that otherwise would have been an RMD in a normal year. That way, you can distribute that money at a lower tax rate than if you wait until the next year. In some cases it can make sense to use just 10-50% of your normal RMD to keep your tax burden lower.
This type of planning requires a long-term orientation. Since the CARES Act has waived most RMDs for 2020, you have more control and flexibility over your age distributions than in most years. So don’t let this get neglected.
2. Roth conversions
Consider the benefits of Roth conversions before the end of the year. Converting money from a traditional IRA or 401 (k) to a Roth IRA is about paying taxes now rather than in the future.
It can be difficult for a retiree subject to RMDs to make effective and tax efficient Roth conversions as you will need to take out the RMD before you can convert any money from that account. This can increase your taxes to the point where switching may no longer make sense.
However, since RMDs are suspended for 2020, you can consider converting what you would normally have assumed as RMD. This allows you to transfer more money to the tax-free Roth IRA instead of leaving the money in the taxable account to be taxed in the future.
If your income went down in 2020 or you were unemployed for a large part of the year, it could be a good year to make a Roth conversion. The reason? You may be in an unusually low tax bracket. This means that you can convert money at a lower tax rate than normally expected, so your Roth funds can grow tax-free, provided you meet certain requirements at the time of distribution.
You can perform a Roth conversion at any time. However, if you want the conversion to be taxed as income for 2020, you must complete the Roth conversion by the end of the year. If you wait for the switch on January 1st, the income will be shown in 2021.
Before making a move, there are many factors to consider, including your long-term goals, tax situation, need for tax diversification, and estate planning needs. As with anything related to tax planning or retirement planning, it is wise to speak to a tax or financial planning professional before making Roth conversions so that you understand the full implications that it will have on your retirement and personal financial goals Respectively.
3. Charitable strategies
When, how, why and to whom is everything important when it comes to giving. It is important to note that most people give not primarily for tax or financial purposes, but out of a desire to make an impact. However, tax and financial considerations can play a role.
First, you need to connect with the charity that you want to support. One of the main reasons for not giving more money to charity is the lack of connection with a charity. So, if you are a nonprofit, have a deep connection with the intended impact, and feel financially able to do it, you can move to the next level of efficient giving.
2020 is a unique time for strategic charitable giving. Due to the fact that fewer people are listed under the Tax Reduction and Jobs Act, many people do not benefit significantly from a tax perspective when they donate to charity. To counteract this, the CARES law provided for a deduction of up to $ 300 for standard exhaust filters. For the majority of the unlisted country, this is a unique above-the-line 2020 charity deduction. This could encourage some to donate to the church, school, or other charity.
In addition, the CARES Act increased the deduction limit for 2020 from 60% of an individual’s adjusted gross income to 100%. Maximizing monetary gifts to 501 (c) (3) nonprofits to reach 100% AGI in 2020 is probably not the best strategy, but it does allow for some larger tax breaks related to gifts in 2020.
Qualified Charitable Distribution (QCD) is one of the most efficient and effective ways to donate from retirement accounts.
After age 70, a QCD allows you to send up to $ 100,000 per person per year direct from an IRA to a qualified 501 (c) (3) nonprofit organization. Couples could each contribute $ 100,000 from their respective IRAs, and the money would not be counted as taxable income. It would also offset all RMDs up to that amount. With many unable to list their donations, QCDs are a way for those over 70.5 to get a similar tax result as none of the traditional IRA distributions would be taxable.
While RMDs were suspended in 2020, QCDs are still allowed. If you are over 70.5 years old, sending money directly to a qualified charity from your IRA may be more efficient, especially if you are not listing line items.
For some, planning charity gifts might include deciding not to donate in 2020. I know charities aren’t going to love this message, but people who have lost their jobs or income may have to wait for their financial situation to improve before they decide to give again. We don’t want to compensate for future old-age insurance because we gave away too much money earlier in life.
If your taxable income is very low in 2020 but you expect it to be higher in 2021, you may want to wait until you give in 2021 to get a better tax deduction on your donations, provided you do can make a listing.
For others, waiting until 2021 might be a smarter strategy due to the RMD temporary suspension. For example, if you use QCDs to offset RMDs, you may want to keep that QCD until January 2021, when RMDs are back in effect. This strategy could allow you to double your donations in 2021, essentially deferring what you plan to give in 2020 to the next year, with the $ 100,000 limit still in place, and possibly more of yours Balance RMD for 2021.
Think long term
Retirement planning is part of personal finances, and personal finances, as the name suggests, are deeply personal. Everyone’s situation is unique, and no tax, donation, or retirement strategy fits or benefits everyone in the same way. Take a look at your long-term goals among the options available with today’s laws, strategies, products, and solutions.
2020 was a challenging year, but don’t let the right planning distract you that can help you with your future retirement savings.