• Bernhardt Wealth Management

Tax Planning for 2020: Five Ideas to Consider Now

Those who received extensions may have just filed their 2019 tax returns, but believe it or not, it’s already time to start thinking about those returns that will come due in April 2021. A slightly more positive fact is that in this very unusual year, there are some unusual opportunities that could save you money on taxes, especially in future years. But the time to implement them is now. Let’s take a look at five tax strategies for 2020 that could save you money for years to come.

Roth conversion. While this is frequently at the top of year-end tax savings idea lists, 2020 could be a particularly strategic year to consider converting a traditional IRA or 401(k) to a Roth account. The main reason is the historically low marginal rates currently in force. Because funds from traditional IRAs must be taxed before conversion to a Roth account, it may make sense to pay those taxes at 2020 rates, especially if, as some analysts believe, marginal tax rates rise in future years as the government begins paying down the massive debt accumulated through pandemic-related stimulus efforts. And once the funds are in a Roth account, you will still enjoy tax-free growth until retirement and nontaxable withdrawals during retirement.


Voluntary IRA distributions. Because the Coronavirus Aid, Relief, and Economic Security (CARES) Act eliminated 2020 required minimum distributions (RMDs) for IRAs, many investors who didn’t need the income have chosen not to take a distribution this year. But it may make sense for some account owners to take a voluntary distribution before the end of the year, paying taxes on it at a low rate, and converting the funds to a Roth account, gifting them to reduce the size of a taxable estate, or other uses.


Qualified charitable distributions. Making a qualified charitable distribution (QCD) from an IRA has always been an efficient way to support a favored charity and avoid paying taxes on the distribution amount. QCDs can also be an effective way to reduce the size of a taxable estate. For clients 70 ½ years of age or older, making a QCD this year could be a tax-efficient way to reduce IRA account balances, which in turn could help reduce the tax bill for RMDs in later years.


Gifting. Currently, the estate tax exemption is $11,580,000 per individual ($23,160,000 for couples), a high enough ceiling to relieve most owners from worry about imposition of estate taxes for their heirs. These limits are already set to expire in 2025, but with ballooning federal deficits, many observers caution that they could be lowered much sooner. For those with large estates, gifting may be important in 2020 as a hedge against a future decrease in the size of the estate tax exemption.


Update estate planning. Continuing the theme of anticipated higher taxes in future years, owners of traditional IRA and 401(k) plans may need to review their planning documents, considering the elimination of the “stretch” IRA for non-spousal beneficiaries. Formerly, a beneficiary had the ability to withdraw the funds from an inherited IRA over the life expectancy of the beneficiary, thus limiting the amount of taxable income required to be withdrawn in a given year. But with the passage of the Setting Every Community Up for Retirement Enhancement (SECURE) Act in 2019, non-spousal beneficiaries are now required to withdraw the funds within 10 years. Even if the beneficiary is a trust, it will be harder to avoid this consequence. This means that account owners should review their beneficiary designations and other documents in light of the changes imposed by the SECURE Act.


If you have questions about the tax-efficiency of your investments or estate planning, we are here to help you find answers. Please contact us. And for more information, you can read our recent article, “The Importance of Stress Testing Your Wealth Strategies,” by clicking here.


Buen Camino!


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