The Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020 received a great deal of attention for its one-time direct payments to taxpayers, but there are other provisions in the act that have also prompted our focus at TGS Financial Advisors. One in particular is the suspension of required minimum distributions (RMDs) for 2020. This RMD holiday may provide a planning opportunity for those who don’t rely on their required IRA distributions to support their lifestyles.
Specifically, if you can do without distributions from your IRA and you find yourself in a low tax bracket this year, the 2020 RMD holiday might make you a good candidate for a partial Roth conversion.
A Roth conversion converts traditional IRA funds to Roth IRA funds. While this generates current-year tax liability, it also brings with it two major benefits: tax-free growth of the converted funds over time, and a reduction in future RMDs, since the converted funds and their subsequent growth are no longer part of the traditional IRA.
Roth IRA funds may also be attractive as part of an estate planning strategy, as beneficiaries also receive tax-free treatment when making Roth withdrawals. With the elimination of the “stretch IRA” as a result of the SECURE Act of 2019, we look to Roth conversions and other strategies that can offer some level of tax-favored transfer to your heirs.
With the elimination of the “stretch IRA” as a result of the SECURE Act of 2019, we look to Roth conversions and other strategies that can offer some level of tax-favored transfer to your heirs.
And what about those who have been making Qualified Charitable Distributions (QCDs) from their IRAs?
A QCD transfers funds directly to a qualified charity from your IRA account, and the amount donated is excluded from your taxable income (unlike regular withdrawals from a traditional IRA). QCDs can be used to count toward partially or fully satisfying an RMD. But with the suspension of RMDs for 2020, does it still make sense to use QCDs for charitable giving? Perhaps.
Even though the QCD-RMD advantage is not available in 2020, QCDs still offer longer-term tax benefits by removing the future growth of the donated funds from the IRA. And because RMDs are based on the prior year-end value, your charitable distribution may reduce your future RMDs.
Since the Tax Cuts and Jobs Act of 2017 enhanced the standard deduction and limited itemized deductions, QCDs have become an even more appealing way to make tax-efficient gifts to charity. So a 2020 QCD strategy might be a smart move even without the need for an RMD (or for those between the ages of 70½ and 72, since you can still make QCDs beginning at age 70½ even though the SECURE Act raised the age for RMDs to 72).
Each of us has unique goals and plans. Be sure to collaborate closely with your advisor to craft and implement strategies that are responsive to recent legislative changes and that best work within the framework of your personal financial plan.
By Thomas A. Rylko, CFP® / Financial Advisor
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