If you (or your parents) have an IRA, read on.
Planning Opportunity #1:
If You Already Took Some
Required Minimum Distributions in 2020,
You Can Avoid Income Taxes By
Acting Right Away
If you reached age 70 ½ in 2019 or earlier, the rule has been you must withdraw from your IRA the Required Minimum Distributions (“RMDs”) in 2020. These withdrawals are typically taxable at your highest bracket rate (which, federal and state combined, may be about 40%!).
However, the CARES Act, enacted on March 27, 2020 and effective retroactively to January 1, permits IRA owners to skip their RMDs for this year. But what if you already took some withdrawals in 2020? Can you avoid being taxed?
First, if you are still within 60 days of a withdrawal, you may roll the funds back into the IRA and won’t be taxed. However, you may already exceed the 60 days, or if you’ve taken multiple withdrawals you are limited to only one such roll back within a 12 month period.
Alternatively, you may take advantage of a special relief rule recently released by the IRS, which most people are unaware of. You can reverse all your taxable RMDs taken this year, so long as you return the funds to the IRA by August 31, 2020.
Planning Opportunity #2
If You Already Took RMDs in 2020,
You May Want to Pay the Taxes !?
This may make sense if you’re in a much lower tax bracket this year than in future years.
Or, what may make even more sense, if you’re still within 60 days of a withdrawal, is to roll it into a new (or existing) “Roth” IRA. You’ll have to pay taxes on the monies rolled but then they can compound tax free, you may avoid future taxable RMDs for both you and your spouse, and the monies can later be inherited by your heirs income tax free! (See our prior Roth article.)
Planning Opportunity #3
If You Didn’t Take Any 2020 RMDs
Or Haven’t Reached 70 ½ Yet
And Don’t Have to Take RMDs . . .
You may want to take withdrawals anyway before December 31, 2020 and pay the taxes on them! That’s because, as stated above, you may immediately roll over those withdrawals into a Roth IRA, let the monies grow without tax and enjoy future income tax freedom when you, your spouse and heirs do pull the monies out.
Before You Do Anything,
Get Proper Professional Advice
These IRA planning decisions, like other estate planning decisions, appear simple on the surface but are more complicated when you examine them in more detail. There are lots of factors which must be weighed, such as your age and health, your current and future cash flow needs, and your current and future income tax brackets.
Our affiliated financial advisors may help you. Contact Pence Wealth Management and schedule a free consultation (either in person, or by zoom or phone). Call now 1.800.731.3623!