2020 Year-End Tax Planning Opportunities

What a year 2020 has been! If there has ever been a year that defied prediction, 2020 has been it. It serves as a good reminder that predictions are far from certain. That being said, financial planning is all about making educated predictions of the future and identifying future risks. Tax opportunities often come from looking around the curve to spot and avoid future risks.

While many are predicting that tax rates must go up after 2020 (and they may), we prefer to focus on what we know. We know that the 2019 SECURE Act increased tax risk to the inheritors of IRAs by eliminating the “Stretch” and limiting beneficiary distributions to ten years. This increased the value of reducing the IRA assets where tax appropriate. For those over 70 who are charitably inclined, the best tactic remains to switch charitable giving from an after-tax account to instead make ‘pre-tax’ gifts directly from an IRA (a Qualified Charitable Deduction or QCD).

The 2020 CARES Act turned off Required Minimum Distributions in 2020, significantly reducing 2020 taxable income for many people over 70 and introduced an additional opportunity to intelligently reduce IRA assets. We are not fans of paying taxes before they are required, but if taxes can be paid at a 12% rate this year instead of a 22% rate in a future year (or more if tax rates do go up), we see that as a good trade. A Roth Conversion is a transaction that allows taxable IRA distributions to be pulled forward into 2020 while they are taxed at a lower rate. Once in the Roth IRA, the assets can grow into the next generation free of the risk of tax increases.

A Roth Conversion is not only for those over 70, it can also be an attractive option for many people under 70, especially if 2020 was a low-income year. We have already started working with many clients and their CPAs to plan on the best 2020 conversion amount. Let us know if we can analyze your situation.