Year End Tax Review and Planning: IRAs, QCDs and RMDs

With less than a month remaining in this most unusual year, taxpayers should evaluate (and perhaps re-evaluate) their current tax situation and decide if additional maneuvering is necessary. 

As 2020 begins to fade in the rearview mirror, it will carry with it (at least for many of us) the title of  “Most Unusual Year”.  It was a year that experienced social unrest, a presidential election and an historic hurricane season….all of which were overshadowed by the global pandemic.  And while many of our routines were thrown into disarray, certain annual rituals have not changed.  In this article, we will address the time honored tradition of year-end tax strategies, specifically as they relate to IRAs.

Review of Tax Policy in 2020: 

• SECURE Act:  As of January 1, 2020, IRAs, 401k Plans and 529 Plans were significantly affected by the Setting Every Community Up for Retirement (SECURE) Act.  Specifically, the new law contained the following provisions:
  • The age at which owners must take Required Minimum Distributions (RMDs) from IRAs and 401ks increased from 70.5 to 72.  Additionally, participants are allowed to contribute to IRAs after age 70.5…which was previously prohibited.
  • Parents can withdraw up to $5,000 from their IRA or workplace retirement plan for each new child without incurring the 10% early withdrawal penalty.
  • 529 Plans:  Participants in 529 Plans can use up to $10,000 to pay for student loans.
  • Stretch IRAs:  Non-spousal IRA beneficiaries are required to distribute inherited IRAs fully within 10 years of the death of the original account holder.  Previously, non-spousal beneficiaries could spread the required distributions over their

   

• CARES Act:  The Coronavirus Aid, Relief and Economic Security (CARES) Act was passed on March 27, 2020 in reaction to the anticipated economic effects of the pandemic.  While broad in scope, several provisions specifically addressed retirement plan assets, and we wrote about it in March of this year: https://cornercap2021.wpengine.com/the-cares-act-relief-for-retirement-plans/
  • IRA owners facing Required Minimum Distributions (RMDs) were given the option to suspend them for 2020…offering a chance to reduce taxable income.
  • IRA owners who had taken some or all of their RMD were given the option to reimburse their IRAs (and again avoid taxable income).  Originally, this allowance was limited to a specific time periods but was later expanded to include all distributions prior to an August 31, 2020 deadline.
  • Penalty-free distribution from IRAs and company retirement plans and enhanced loan provisions from employee-sponsored plans.

STRATEGIES/PLANNING

In addition to the direct benefits listed above, taxpayers can take advantage of indirect benefits associated with the CARES Act…along with traditional tax-savings techniques:

• Roth IRA Conversions:  In a year where RMDs have been suspended, IRA owners can convert all or a portion of their IRA to a Roth can do so without the added tax liability of the RMD (in normal years, RMDs must be satisfied before an IRA owner can convert).  If the converted amount is significant enough, future year RMDs may be lower due to the reduced value of the IRA.  Coordinating this type of strategy with your tax advisor is critical.
• Qualified Charitable Distributions (QCD):  Charitably-inclined IRA owners who face RMDs still have the option in 2020 to use their IRA for charitable gifting (up to $100,000).  Though the taxpayer will not immediately benefit from QCDs (in normal years, QCDs help satisfy RMDs without being included as income), they may also help reduce future year RMDs by lowering the value of the IRA.
• In Kind Gifting:  As always, taxpayers with deductions in excess of the standard deduction amount can gift appreciated securities.  The benefits are income reduction through charitable deductions and avoidance of capital gains tax.