Cheers to 2021 quickly approaching! Before we pop the Champagne, you might have a few remaining items on your retirement planning to-do list. Below are some important financial deadlines between now and December 31, 2020.
Donate to Charity
December 31, 2020 is the last day to make charitable contributions that would impact your 2020 taxes. Thanks to the CARES Act, taxpayers can claim up to $300 in cash contributions to charity made by December 31 as a deduction without itemizing.
Those age 70 ½ and older may also consider a Qualified Charitable Distribution (QCD), a tax-free transfer directly from your IRA to a charity. A QCD for 2020 must be done by December 31.
Tax Loss Selling
Tax loss selling is the selling of stocks, bonds, mutual funds, and other investments at a loss to reduce your capital gains tax burden. Investors can deduct up to $3,000 of losses per year and carry any remaining losses over to future years. The deadline for tax loss selling is December 31.
You Do NOT Have to Take an RMD
The CARES Act suspended all required minimum distributions (RMDs) for 2020. If you don’t need one, don’t take one. Yippee!
Do a “IRA to Roth IRA” Conversion
If you wanted to convert an IRA to a Roth IRA in 2020, the deadline is December 31, 2020. The distribution must be taken in 2020, so you’ll want to leave enough time to get the transaction done. Please call the office as soon as possible if you are interested.
Most clients already know I am not a huge fan of the Roth IRA, because I would rather get my tax deduction right away on the contribution side. However, converting a traditional IRA to a Roth IRA can have major tax benefits.
Roth IRAs grow tax-free, do not tax qualified withdrawals, and do not have “required minimum distributions” for those age 72 and above. By converting to a Roth IRA, you can take advantage of low tax rates right now, and avoid worrying about possible tax hikes down the road.
You will be taxed one time for a Roth IRA conversion. Your traditional IRA funds will be considered “income” for tax purposes ONLY in the year of the conversion. Now would be the ideal time to get this over with because tax rates are low.
If you think you might be a good fit for this strategy, call the office and let’s talk about it. Conversions cannot be undone, so we want to make sure it would be appropriate for your existing cash flow and liquidity needs.
Take a Coronavirus-Related Distribution
Thanks to the CARES Act, qualifying individuals who are suffering financial hardship due to the pandemic can take Coronavirus-Related Distributions (CRDs) penalty-free from their retirement accounts. Income from CRDs can be spread equally over three years.
You have to meet certain requirements, such as testing positive for the virus or suffering direct financial hardship due to the virus. CRDs expire December 30, 2020. If you end up not needing the funds, you have three years to repay them to your retirement account.
Stay Compliant with the NUA Tax Break
Net unrealized appreciation (NUA) is the difference between the original cost basis and current market value of shares of employer stock. The IRS allows for a more favorable capital gains tax rate on the NUA of employer stock upon distribution, after certain qualifying events. These can include leaving the company, turning age 59 ½, death, and disability.
If you took a distribution of company stock from your company plan and are looking to use the Net Unrealized Appreciation (NUA) tax break, the entire distribution must be completed in one tax year. Make sure all funds have been withdrawn from the plan and transferred to a taxable brokerage account as part of a qualifying lump-sum distribution.
Happy New Year!