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Financial Planning Strategies to Close Out 2020

It is an understatement to say a lot happened in 2020, but as far as your finances, there was a lot of new legislation this year. We thought the SECURE Act was going to be the big news for 2020, then along came the CARES Act. I think I mentioned that earlier this year with that exact phrase, yet as we look at year-end planning strategies, it bears mention again. I know we are all anxious to put 2020 behind us, but we do not want to forget to take advantage of any financial opportunities that these Acts might offer.

The CARES Act mostly impacts your 2020 financial strategy, whether you took advantage of the Required Minimum Distribution (RMD) waiver, or the expansion of charitable contribution provisions or even the Coronavirus-related distribution rules. You still have time to bunch charitable contributions into 2020 to potentially take advantage of itemizing for the year, as opposed to taking the standard deduction. If you are using the standard deduction, note that the CARES Act allows a one-time above the line deduction for cash contributions up to $300.

We are finding many clients looking at ROTH conversion strategies as we close out 2020.  Waiving RMDs lowered taxable income, providing room to look at tax bracket strategies to do some conversions. The SECURE Act moved the RMD age to 72, providing a longer window for clients not yet taking RMDs to convert. If the 2017 Tax Cut and Jobs Act sunsets or tax rates otherwise increase, your future RMDs might throw you into a higher bracket in the future, whereas ROTH IRAs do not have an RMD requirement.

Our least favorite provision of the SECURE Act is the elimination of the stretch IRA rules effective January 1, 2020. Your beneficiaries will now inherit your IRA with a 10-year payout requirement instead of being able to stretch the IRA over their lifetimes (barring some exceptions). ROTH IRAs are inherited tax-free, which is more advantageous, especially for higher income beneficiaries. In addition, ROTH IRAs provide future flexibility for you, if tax rates do rise, to use withdrawals from your ROTH IRA to meet your spending needs while managing your tax bracket each year.

The CARES Act did add to the flexibility of using your HSA plan, and we continue to note that these plans offer excellent savings opportunities, assuming you are eligible to contribute to an HSA. Check now to make sure you maxed your HSA for 2020. In addition, end of year is also a time to ensure you have maximized your retirement plan contributions for salary deductions to employer plans. You have until April 15, 2021 to make any individual IRA contributions for 2020 of course.

Some year-end planning strategies exist every year regardless of new legislation. Managing your capital gains is always on the agenda, as this is the time to consider any tax loss harvesting depending on the positioning in your portfolio.  In addition, Qualified Charitable Distributions (QCDs) are still a great strategy, especially looking ahead to 2021.

Looking ahead to 2021, remember to evaluate your RMDs, including from your inherited IRAs, as the calculation is updated each year. Maximize, minimize and itemize! All of these are year-end strategies to work on with your financial advisor and your tax advisor. Let’s be smart about closing out 2020, even if we are ready to move on.

Cathie Straub, CPA, CFP®
Director, APCM Wealth Management for Individuals


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