End of the Year Tax Planning Reminders

Posted By: Chris Tanner ICOR Blog & News,

As a partner in your retirement investing, New Direction Trust Company encourages investor education to make the most of tax planning opportunities. Year-end is a good time to consider strategies that could assist you in reaching your goals. Let’s look at a few things that you may want to consider as you plan for your 2020 tax return.

Roth Conversion? The IRS allows individuals to convert a portion or, all of their tax deferred retirement plan to a Roth IRA or Roth 401(k). Upon conversion the account owner incurs ordinary income tax on the amount converted, subject to any basis limitations. However, once converted Roth dollars grow tax free AND are withdrawn tax free, assuming certain guidelines are followed. For comparison, tax deferred plans like Traditional and SEP IRAs grow tax free but are later taxed at distribution.

Why would someone consider a Roth conversion? In a year marked by Covid, it’s possible taxpayers may have reduced income, resulting in a lower income tax bracket. This creates a window to convert at a much lower tax rate. Doing so also eliminates uncertainty surrounding tax rates at retirement, a meaningful variable in retirement financial planning.

IRA & 401K Contributions: To reduce your 2020 taxable income consider contributing to a tax deferred retirement account like an IRA, 401(k) or even your Health Savings Account (if you qualify). You can contribute $6,000 to a Traditional IRA and up to $57,000 to a SEP IRA. If your employer has a 401(k), you can contribute $19,500. Don’t forget the Catch-up contributions for taxpayers over the age of 50.

Required Minimum Distributions & Covid Distributions: New legislation enacted in 2020, the SECURE Act, increased the age at which people must begin taking retirement plan distributions from 70.5 to 72. The CARES Act, which was passed in March of 2020 in response to the Covid pandemic, has some additional features worth considering. First, the IRS is allowing people affected by Covid to take penalty free distributions from their retirement plans. Withdrawals under this condition may or may not be taxable, depending on whether recontributions are made. Second, required minimum distributions are optional in 2020.

Check your Designation of Beneficiary Form(s): Estate planning experts recommend reviewing your retirement plan designation of beneficiary (DOB) form(s) annually. First, make sure you have a DOB form for every retirement plan you own. The DOB supersedes any Trust or Will documents you may have in place, so be sure to have one on file for every retirement plan. Second, make sure the DOB is current with your estate planning wishes. People often forget to update the DOB after major life events like marriage, divorce, births and deaths.

If you have any questions or need a more detailed explanation, please feel free to contact us at (877) 742.1270.