IRA Financial’s Adam Bergman Esq. discusses maximizing your retirement benefits and key year-end tax planning tips for 2020.

As we approach the end of another year, Adam Bergman is back with another episode of Adam Talks, in which he talks about key year-end tax planning opportunities and retirement plan deadlines. Obviously, 2020 has been a crazy for everyone. Investors have lost lots and can at least take advantage of these tips to hopefully salvage something. Of course, our thoughts are with everyone who has been affected by the COVID-19 pandemic. With that, let’s discuss some things you can do as an investor to save a little money.

Where We Stand Now

A lot has happened this year. After the first wave of COVID-19 swept through the country, the government gave us the CARES Act, which brought stimulus to individuals and business alike. There were also key provisions to help Americans dip into their retirement savings penalty-free. This past November, after a long and contentious election campaign, Joe Biden was elected as our new president. This may lead to tax changes, and if you listen to the podcast, you know “Cash is Trash” and inflation is around the corner.

There are few things you can do as an individual or as a business owner to save on taxes for this year. Some of these items have to be taken care of before the end of the year, however there are some things where you have extra time – usually the deadline for filing tax returns, April 15, 2021.

The CARES Act has several provisions that must be taken by December 31, 2020. Some of these will help save on taxes, while others may leave your retirement savings in better shape.

Year-End Tax Planning

Let’s first dive into the CARES Act provisions that must be taken advantage now. The first one are coronavirus-related distributions from your IRA or 401(k) plan. The CARES Act allows you to withdraw up to $100,000 penalty-free from your retirement plan. Normally, if you are under age 59 1/2, you would get hit with a 10% early withdrawal tax. That penalty is waived, but only if you have been affected by the coronavirus. Essentially, if you, or your close relatives have contracted the virus, OR you have lost wages because of it, you can claim a coronavirus-related need. You have until December 31 to take a distribution if you absolutely need to. Taxes can be paid over the course of three years. Lastly, if you re-contribute those funds to a retirement plan within that three-year period, you will not owe any taxes (and will be refunded for any taxes paid out).

Further, the CARES Act has waived required minimum distributions for 2020. If you are at least age 72, you must start withdrawing funds from your traditional 401(k) and IRA or a Roth 401(k) plan. You get a reprieve this year, allowing you to keep those funds in the plan. This is especially helpful if your plan assets have fallen dramatically since last year.

The Act also includes provisions for Net Operating Losses, qualified improvement properties, and allows you to deduct certain expenses in regards to your business. Plus, you can receive a deduction when making a charitable contribution, even if you do not itemize. Mr. Bergman explains these in detail in the podcast, so be sure to listen!

Retirement Planning

If you haven’t been able to contribute to your retirement plan this year, there is still time. If you have a traditional IRA, you can contribute pre-tax funds up until April 15, 2021. You may contribute up to $6,000 (+$1,000 if age 50+) and receive a tax break on your 2020 income tax bill. Of course, you need earned income to contribute to the plan, and you must be under the threshold set by the IRS to receive the deduction. You may also choose to contribute to a Roth IRA, but there is no tax deduction for Roth contributions.

If you are self-employed and do not have a retirement plan, you should consider “going solo.” You now have until you file your taxes to open and fund a Solo 401(k) plan. You can contribute as both the employee and the employer with a Solo 401(k). Employee deferrals should be made before the end of the year, while employer profit sharing contributions can be made up until you file your taxes.

If you are a small business owner, it’s beneficial to set up a retirement plan for your employees. Not only will it help get and retain employees, but you can save for retirement and even receive a credit for starting the plan.

Although RMDs are not required this year, you can withdraw funds from your retirement plan and donate them to a qualified charity. Any amount withdrawn and given to charity will not be included in taxable income. Of course, you do not have to withdraw this year, but this is something to keep in mind for next year when RMDs are back in effect.

Roth Conversion?

Roth IRAs are very popular because of the tax-free distributions they offer. It’s even more important in 2020 since many assets have lost a lot of value and are considered “depressed.” Assets held in a traditional, pretax IRA may be worth converting now. If the value is less than normal, and you expect to go up in the future, it makes sense to pay the taxes now and have tax-free distributions during retirement.

It’s important that you’re aware of the tax implications. Any funds converted will be treated as taxable income. It doesn’t make sense to use converted funds to pay these taxes. Therefore, if you have the money on hand to pay the taxes, it makes more financial sense.

Other Tax Deductions

We all know the standard deduction was raised, but limited other deductions. If your total annual itemizable deductions for 2020 will be close to your standard deduction amount, consider making additional expenditures before year-end to exceed your standard deduction. The easiest way to do this is to make a mortgage payment that is due January 1 before the end of 2020. Mortgage insurance premiums for eligible taxpayers also are deductible in 2020 but will once again be disallowed in 2021 barring extension. Paying off state and local income taxes and property taxes may save you on taxes as well. However, not everyone will receive those deductions.

Further, you or your dependents may be eligible to take advantage of 0% income tax rate on long-term capital gains and qualified dividends from securities held in taxable brokerage firm accounts. There are income limitations that may limit you personally benefiting, but you can gift them to relatives who may be in the 0% bracket, so they would not pay taxes on the sale of the stock.

Lastly, you may want to consider a low interest rate loan to relatives. You can charge a low, one percent interest rate and avoid a gift tax. Make sure to properly document the loan.

More Information

This podcast served as a condensed version of a webinar Mr. Bergman hosted recently. You can follow the link if you need more information on year-end tax planning and retirement saving opportunities. Remember, that even when the calendar changes to 2021, you still have time to save on your tax bill for this year.

Thanks for watching, and we hope everyone has a very happy holiday season, even if it’s not the one we dream of each year. Be sure to check out our SoundCloud page for all of our podcast episodes!