Now is an ideal time to consider year-end strategies that may benefit you and for the years ahead.
Tax planning is a little different this year. Tax rates may go up in the future, because there’s a new President with new policy initiatives coming and the national debt has dramatically increased in 2020. While no one knows for sure how tax policy will evolve in the coming years, it is hard to imagine taxes going down. More likely they will rise.
It is prudent to re-think some generic tax tips, such as deferring gains and harvesting losses. Based on your individual circumstances, 2020 may be a year to turn this advice on its head.
We advise taking a personal approach to tax planning. Here are 8 questions we’re helping clients with now:
- Should you complete a partial or full Roth IRA conversion?
Converting to a Roth IRA may offer you more flexibility and control over your nest egg during retirement. While there are many factors to consider, you may be able to reduce your tax burden in the future with a conversion.
- What’s the best way to put extra savings to work?
You may be able to contribute to a 401(k), IRA, Roth IRA, or Roth 401(k).
- What to do about your required minimum distribution (RMD)?
2020 was an RMD holiday. Did you roll or return a required minimum distribution (RMD) back into your IRA or retirement account? Not everyone will want to do that. Although without an RMD, you may have lower AGI this year.
- Can you benefit from recognizing any capital losses? You may be able to offset capital gains.
- Does it make sense to take some profits and reposition assets? If your income or tax rate is expected to increase in the future, recognizing some profits may make sense for you.
- Do you want to do any charitable giving before year-end?
Charitable planning is a little more complicated this year. Even though RMDs have been waived for 2020, you can still do qualified charitable contributions (QCDs) from IRAs. The maximum contribution is $100,000 and you won’t have to include the donated amount in your taxable income.
- Is your estate plan up to date?
Do you have a will, revocable trust, health care directive and power of attorney in place? Are your beneficiaries up-to-date? 2020 has been a year of devastating loss of life, and the pandemic is not over. Do you want to do any annual exclusion giving? You can give up to $15,000 to as many people as you like.
- Are you invested in a tax-efficient way?
Taxes can erode returns. We pay careful attention to tax efficiency with assets that we manage for clients. But do you own any assets with other brokerages or mutual fund companies? Be aware of dividend and capital gains distributions from mutual funds held in taxable accounts. We can help evaluate your circumstances and recommend tax-saving choices. If the fund hasn’t issued distributions yet, consider selling before. You may be able to avoid unexpected capital gains and reallocate assets to seek higher after-tax returns.
There is a lot to consider. Life has been hard enough this year without having to find time and figure out these things on your own. You do not have to address this all at once.
Don’t forget your financial advisors are here to help. We’re in this together.
Please discuss any ideas or questions with your financial advisor.