By JP Pedinielli

2020 can be defined as a year with uncertainty, apprehensions and surprise.  However, there are still opportunities that you can take advantage of before yearend to help yourself financially.

Here are five ideas to discuss with your tax and financial advisor before yearend.

  • 2020 Roth Conversion

The current low tax rates will not last.  The TCJA already has tax rates set to increase after 2025, back to the levels of pre-2018.  However, with only a few weeks to go before the Senate run-off election in Georgia, it is conceivable that tax rates may change as early as next year.  Either political party may be forced to change tax rates in 2021 due to the increasing national debt levels and deficit.

Tax-deferred retirement accounts like an IRA only put off the tax liability until some point in the future.  As advisors it is our job to help keep your tax liability as low as possible, in order to positively impact your net worth.  By this time of year, most individuals have a reliable estimate of what their 2020 income looks like.  With these estimates, you can make a Roth conversion up to whatever marginal tax rate is most beneficial to you.  With the potential for tax rates to increase in the near future, paying taxes on the conversion at today’s lower rates removes a layer of uncertainty.  It has been our experience that clients will be in a lower tax bracket immediately after retirement.  However, with a Required Minimum Distribution (RMD) from an IRA and when Social Security benefits begin, often their tax rate increases above a pre-retirement level.  Since Roth withdrawals are tax-free and have no RMD, these accounts can grow tax free for as long as the account holder is alive.

  • IRA Distribution

The 2020 CARES Act waived any requirement to take a distribution from your IRA for the year.  However, it still may make sense to take voluntary distributions and convert those distributions to a Roth.  Reducing your current IRA balance today will reduce the amount of RMDs needed in the future.  This may be a good time to take advantage of lower tax rates before your IRA balance grows, which would cause your future tax liability to increase.  Whatever the reason, taking IRA distributions this year will help in reducing IRA balances before the future tax liability gets problematic. 

  • Qualified Charitable Distributions

A Qualified Charitable Distribution (QCD) is the most tax-efficient way to make a charitable contribution, since they reduce your taxable IRA balance at no cost.  You must make a direct transfer from your IRA account to a qualified charitable organization to take advantage of this benefit.  The QCD is only available to IRA owners older than 70 ½.  Since the 2018 TCJA was enacted, there are fewer taxpayers itemizing deductions and more who are taking the standard deduction.  By making a QCD, you will receive the standard deduction as well as an exclusion from income in the amount of the distribution.  An exclusion is considered an “above the line” item because it reduces your adjusted gross income.  It is important to get any QCD completed before the end of the year because the funds must come out of the IRA by that time in order to qualify for the deduction. 

  • Gifting

The 2020 estate and gift tax exemption is $11,580,000 per person ($23,160,000 for a married couple).  While they are scheduled to revert to $5 million and $10 million respectively in 2025, they can be changed anytime by Congress.  If your estate is valued above these amounts, it may make sense to make these gifts now, before the law changes again.  There is a $15,000 annual gift exclusion that can be made to anyone each year and the gift does not reduce the estate exemption.  You can also make gifts by making direct payments for tuition and medical expenses.  Both of these gifts are always tax-free, even if the estate exemption has been used up.  For the $11,580,000 lifetime estate exemption, the IRS has stated that there will be no claw back if the exemption amount is changed in the future.  One novel way to get the most bang for your buck is to use gifts to help family members pay the tax on Roth conversions.  One thing to take note of is it may not make sense to gift highly appreciated assets as those assets may get a step-up in their basis at the time of death of a decedent.

  • Estate plans after the SECURE Act

The SECURE Act eliminated a valuable strategy for most non-spouse IRA beneficiaries.  The Act states that non-spouse beneficiaries are subject to the entire inherited IRA being withdrawn by the end of the 10th year of the IRA owner’s death.  Many trusts are named as IRA beneficiaries and most of these trusts will be impacted by the tax law changes.  Make sure to review your trust document to see if it will be impacted by the 10-year provision.

Some of these strategies may not apply to you, but the important takeaway is that before the end of the year you will want to schedule a meeting with your advisor and review various opportunities to evaluate your retirement plan, save on taxes, and update necessary estate documents.