End of Year Tax Strategies

Back in June of 2013 I received a call from my friend Steve who happened to work for the Miami Heat. He had the opportunity to get tickets to the NBA Championship versus the San Antonio Spurs. Even though I am not a huge NBA fan, I jumped at the opportunity.

The day of the game, another friend of mine, Garrett, joined me for the big showdown. As we drove south on Interstate 95, we could see up ahead that traffic was halted to a stop. Garrett quickly said, “hurry up, get over to the left!” I was able to move over into the High Occupancy Vehicle(HOV) toll lane. There was a fee to use this lane however I was happy to pay the small fee.

For the next thirty minutes, we cruised by what seemed like a sea of cars in the right four lanes. We must have passed thousands of vehicles. It was like they were all sitting in a parking lot. However, our lane was mostly clear and we made it to Miami with time to spare so we could grab a beer before tipoff. Had Garrett not told me about this alternate route, we probably would have been late to the game. In case you were wondering, the Miami Heat won the NBA Championship that night!

Similar to the story above, having the right information–at the right time, can be very beneficial. As 2020 comes to a close, retirees should be mindful of certain tax laws that could be used to their benefit:

RMD Age – The SECURE Act was passed in December 2019 and it brought about many changes. One of the main changes was moving the Required Minimum Distribution(RMD) age from 70 ½ to 72. First of all, this makes things much easier to keep track of. For anyone born on or after July 1, 1949; the new age of 72 applies to them. What does this mean?

If a person has Tax-Deferred accounts(i.e. IRA, 401(k), 403(b), Deferred Compensation, SEP, SIMPLE, etc), at age 72, the Federal Government requires that you take a distribution from these funds and pay taxes on that income. Essentially, you have deferred paying taxes and the Federal Government now makes you take out money so that they can get their cut.

No RMD – The CARES Act was passed in March of 2020 and it allowed retirees to not take their RMD for the tax year, 2020. If you need the income from your RMD, you can still take it. However, not having to take your RMD could help if you have gains within a non-qualified account that you would like to realize. This may also be welcomed news for someone who has additional income in 2020 and will be paying a lot in taxes.

Roth Conversion – Not being required to take your RMD in 2020 could be beneficial for long-term tax planning. The question becomes: Should you take a withdrawal regardless or should you leave it in the tax-deferred account? If you leave it in the account, you may need to take out slightly more next year.

One option can be to take the RMD and fund a Roth IRA as Roth conversion. You will pay income tax on the Roth Conversion amount however the Roth balance will grow tax-free. Once you turn 59 ½ and leave the money in the Roth IRA for at least five years, you can withdraw both contributions and earnings tax-free.

The retirement journey could span several decades. Knowing the right path to take is important for any journey, especially one that could last that long. Understanding how the current tax law affects you and your family may help improve your financial situation.

For instance, there is a section of the tax code that allows investors to grow money and withdraw funds, tax-free. This strategy is not a Roth conversion and could benefit you and your family. If you would like to know more, please give us a call at (863) 304-8959.

Please remember that converting an employer plan account to a Roth IRA is a taxable event. Increased taxable income from the Roth IRA conversion may have several consequences including (but not limited to) a need for additional tax withholding or estimated tax payments, the loss of certain tax deductions and credits, and higher taxes on Social Security benefits and higher Medicare premiums. Be sure to consult with a qualified tax advisor before making any decisions regarding your IRA. It is generally preferable that you have funds to pay the taxes due upon conversion from funds outside of your IRA. If you elect to take a distribution from your IRA to pay the conversion taxes, please keep in mind the potential consequences, such as an assessment of product surrender charges or additional IRS penalties for premature distributions.

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