Act By The End of 2020 For A Major Retirement Income Tax Break
A constellation of factors suddenly have aligned to create a major tax planning opportunity for individuals who take required minimum distributions from a federally qualified retirement account or are about to start taking RMDs.
A provision of the CARES Act – the Covid crisis emergency aid law effective since March 27, 2020 -- lets you elect to skip your required minimum distribution in 2020. Since individuals of RMD-age have been staying at homebound during the Covid crisis and are spending less, skipping all or part of an RMD may make financial sense. Skipping an RMD in 2020 would leave that money to compound tax-free longer. But here’s where the unusual of alignment of factors takes a special twist.
Instead of skipping your 2020 RMD and simply leaving it sit in your traditional retirement account or IRA, you can withdraw all or part of it, pay the income tax on the withdrawal and use it to fund a tax-free Roth IRA! Distributions taken as RMDs are taxable; distributions from a Roth IRA are not! Converting assets to a Roth IRA could provide tax free income year after year to you, and when you die, to your spouse and your IRA beneficiaries for many years.
This is a particularly good time to convert assets from a traditional federal retirement account to a Roth IRA. Why? Because when you withdraw assets held in a traditional IRA or federally qualified retirement account, you owe income tax on the withdrawals. But, the unusual constellation of factors making it possible for you to live on a lower income during the Covid crisis creates this unusual tax saving opportunity for long-term investors who act before the end of 2020.
With stock prices off their all-time highs and continuing to suffer large one-day drops, selling stocks in a traditional IRA or retirement account to withdraw the assets you want to convert into a Roth IRA makes particularly good sense. In addition to selling stocks when they are relatively cheap, you are also realizing the income withdrawn from the traditional retirement account at a time when the Covid crisis has kept your expenses low.
Between now and the end of 2020, the unusual constellation of events makes it wise to evaluate skipping a required minimum distribution and converting to a tax free Roth IRA. It is a major tax saving opportunity that you do not want to miss.
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