The Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020 eliminated the need for retirement account holders to take Required Minimum Distributions (RMDs) for this year. This RMD holiday for 2020 is very unique and the lack of a required distribution will help many retirees save on taxes this year. However, just because you do not have to take an RMD this year, does not mean you should ignore your retirement accounts in 2020 as this year presents unique planning opportunities.
As we think about those potential planning opportunities, it’s important to take a step back and think about your individual tax situation. Most retirees face a higher level of taxable income each year due to Social Security increasing as well as Required Minimum Distributions increasing. On top of that, based on current tax law, tax rates are scheduled to increase, and tax brackets compress in 2026. Meaning that election results aside, retirees are very likely to find themselves paying higher taxes in the future than they are today.
One way to take advantage of a lower tax bracket in 2020, is to simply withdraw assets from your IRA anyway but since you have control over the amount, you can be more strategic. For instance, if you typically find yourself in the 32% tax bracket but without an RMD you are in the 24% tax bracket this year, you can withdraw an amount that allows brings you to the maximum of the 24% bracket, without pushing yourself into the 32% tax bracket, to fully take advantage of that lower rate.
Another option in 2020 to utilize your lower tax bracket is to evaluate a Roth Conversion. Normally, since you are required to take your RMD, the converted amount from the Roth conversion would be taxed at the higher rate, in addition to the RMD tax implications, making it not an attractive strategy for those who are RMD age.
With no RMD required in 2020, you can start converting dollars into a Roth from dollar number one, making it much more attractive to do so.
Qualified Charitable Distributions (QCD)
Finally, it’s important to note that while RMDs are not required in 2020, you can still use your IRA to make charitable contributions. The QCD is a great strategy as it allows you to send assets from your IRA (which would normally be taxable if withdrawn) directly to charity, allowing you to fulfill your charitable goals without those distributions being taxed.
While the RMD holiday in 2020 is certainly a great tax reprieve for retirees, given the likely future direction of taxes we believe it’s important to remain proactive about tax planning and take advantage of likely lower rates that you will experience in 2020.
Important disclosure information
Please remember that different types of investments involve varying degrees of risk, including the loss of money invested. Past performance may not be indicative of future results. Therefore, it should not be assumed that future performance of any specific investment or investment strategy, including the investments or investment strategies recommended or undertaken by RegentAtlantic Capital, LLC (“RegentAtlantic”) will be profitable.
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This article is not a substitute for personalized advice from RegentAtlantic. This article is current only as of the date on which it was sent. The statements and opinions expressed are, however, subject to change without notice based on market and other conditions and may differ from opinions expressed in other businesses and activities of RegentAtlantic. Descriptions of RegentAtlantic’s process and strategies are based on general practice and we may make exceptions in specific cases.
RegentAtlantic does not provide legal or tax advice. Please consult with a legal and or tax professional of your choosing prior to implementing any of the strategies discussed in this article.