COVID-19 Tax Planning Ideas
April 12, 2020
Retirement Fund Planning Opportunities:
Below is a list of the provisions in the CARES Act which impact retirement accounts:
- The due date for 2019 Traditional and Roth IRA contributions is automatically extended to July 15, 2020 to coincide with the revised individual return due date.
- Required Minimum Distributions are waived for those over 70 ½ for 2020 for defined contribution plans including: IRAs, 401(k), 403(b) and governmental 457(b) plans.
- Distributions from tax-deferred retirement plans up to $100,000 for those under the age of 59 ½ are not subject to the 10% early distribution penalty for 2020.
- The tax on taxable retirement distributions up to $100,000 taken in 2020 can be paid over a 3-year period beginning in 2020, or if the distribution is repaid to an eligible plan within a 3-year period, none of the distribution is taxable.
- The amount that can be borrowed from a qualified retirement plan is increased for 2020 from $50,000 to the lesser of $100,000 or 100% of the account balance, with repayment requirements delayed for 1 year.
Reasons you may want to decline taking the usual required minimum distribution for 2020:
- Decreasing your income for 2020 could result in you falling into a lower tax bracket.
- Keeping your retirement funds in your retirement account avoids the sale of your investments at this inopportune time when there has been a large market decline.
During times of financial hardship, it is normal for people to look for other sources of funding to sustain themselves. However, we do not recommend taking withdrawals from your retirement accounts unless necessary and without having first discussed with your GPW tax professional and your financial advisor.
Since the CARES Act provided taxpayers with more time to put money into an IRA for 2019, we recommend taking advantage of this and maxing out contributions to retirement accounts when at all possible.
If you plan to take advantage of the penalty free distribution of up to $100,000, be aware that if you opt to repay the distribution to avoid taxation, the entire amount distributed from the account needs to be repaid in full, including any amount that had previously been withheld for taxes on the initial distribution. For example, if you took a distribution of $100,000 and the custodian withheld $30,000 in income taxes, resulting in a net check to you of $70,000, you would be required to repay the entire $100,000 to avoid taxation.
Income down, Retirement Portfolio down, this is the time to consider Roth IRA Conversions:
A Roth IRA has always been a great tax planning strategy, because the money invested in a Roth IRA grows tax free, there are no required minimum distributions, and if taken after age 59 ½ distributions are tax free. For those expecting a drop in income for tax year 2020, this could be the opportune time to put money into a Roth IRA, since you could potentially be in a lower tax bracket. If your retirement account is undervalued due to the significant stock market decline, or you’ve never put money into a retirement account, it is worth considering opening a Roth IRA account or doing a Roth conversion. This way you are getting your money into the account when the values are at their lowest, making sure you get the benefit of tax-free growth when stocks rise.
The maximum amount you can contribute to a Roth IRA for 2020 is $6,000 if you’re under the age of 50, or $7,000 if you’re age 50 and older, phased out based on Adjusted Gross Income (“AGI”) as follows:
|Phase out AGI range|
|Single||$124,000 – $139,000|
|Married Filing Joint||$196,000 – $206,000|
For those that are unable to contribute directly to a Roth IRA due to the AGI limitation, there is no limit to the amount you can convert from a traditional IRA, SEP, SIMPLE IRA, 401(k), 403(b), or 457 plan into a Roth IRA. The amount converted is taxable in the year of conversion, so the ideal time to do this, is in a year when you expect to be in a lower income tax bracket. There are no limits to the number of conversions you can perform and there are no penalties for rolling a qualified account into a Roth IRA account. You must do the Roth IRA conversion through a trustee-to-trustee transfer or same trustee transfer.
To estimate the tax impact of a Roth IRA conversion on your 2020 tax liability, download our 2020 Roth IRA Conversion Calculator below.