CARES Act, SECURE Act, Unique Opportunities - Taxes: Part 3

CARES Act, SECURE Act, Unique Opportunities - Taxes: Part 3

October 30, 2020
Welcome to the Weekly SUMmary - 10/30/2020
Continuing the topic of taxes, today we'll look at how a couple of recent Acts have made certain strategies especially intriguing for 2020.

If you gain nothing more from this post, please SPEAK TO SOMEONE about your options prior to year end. These could include:

  • Contributions
  • Distributions
  • Roth Conversions
  • and more
First, let's look at some highlights of the CARES Act (previous blog post here) regarding taxes in 2020:
  • Suspended RMDs - for those of you who are as bad with acronyms as I am, this stands for Required Minimum Distribution. These are required because funds that have been contributed to accounts pre-tax have never paid taxes on those contributions, therefore, the government forces us to take funds out of the account, causing a taxable event.
    • This suspension extends to inherited retirement accounts. Although there is no clarification as to how this will work moving forward, no distribution is required in 2020. The clarification necessary is that if you skip this year's distribution, does one get to add that year to their limit to remove funds from the inherited account? For example, prior to the act below, heirs had 5 years to remove funds. If this would have been the last year, 5, the assumption is that the heir can wait until next year to take the final distribution, but what if this would have been the second distribution? Are there still 4 future distribution years, or did we skip the 2nd and still only have 3 future distribution years? That could be a significant tax impact on those taking withdrawals.
  • Withdrawal Penalties - Account owners can take a distribution of up to $100,000 from their retirement plan or IRA in 2020, without the 10-percent early withdrawal penalty that normally applies to money taken out before age 59½. But remember, you still owe the tax.1
Second, let's look at the SECURE Act:
  • Limits on Stretch IRAs - Prior to 2020, more heirs had the ability to stretch distributions of inherited accounts over their lifetime. Now, many only have the option to "stretch" distributions over 10 years. See additional information here.
  • "IRA Contributions and Distributions - Another major change is the removal of the age limit for traditional IRA contributions. Before the SECURE Act, you were required to stop making contributions at age 70½. Now, you can continue to make contributions as long as you meet the earned-income requirement.2
    Also, as part of the Act, you are mandated to begin taking required minimum distributions (RMDs) from a traditional IRA at age 72, an increase from the prior 70½. Allowing money to remain in a tax-deferred account for an additional 18 months (before needing to take an RMD) may alter some previous projections of your retirement income.2
    The SECURE Act’s rule change for RMDs only affects Americans turning 70½ in 2020 or later. For these taxpayers, RMDs will become mandatory at age 72. If you meet this criterion, your first RMD won’t be necessary until April 1 of the year after you reach 72."2 Reference
  • Changes for penalties for families with children or taking education related distributions - see here.
  • More information on the above, and information for employers can be found at these links:

Now, on to why one may want to consider the options mentioned above, and for explanation of why a Roth Conversion may make more sense this year than others.

  • Many have lower income 2020, lowering overall tax liability (on income).
  • RMD suspensions in 2020
  • new rules on RMD beginning at 72
    • If one had already planned for required distributions this year, if it is not needed, convert instead.

Obviously there is a lot to consider on this topic. It can be quite complicated. Nothing mentioned is meant to be a recommendation, but food for thought in conversations with tax or financial professionals. I strongly urge you to meet with your advisors before 2020 comes to an end to explore options and strategies to benefit you and your family into the future.

  1. The Wall Street Journal, March 25, 2020
  2. Marketwatch, 2019

This is meant for educational purposes only.  The information is based on data gathered from what we believe are reliable sources. It is not guaranteed by Waddell & Reed, Inc. as to the accuracy and is not intended to be used as the basis for any investment decisions. It should not be considered investment advice, nor does it constitute a recommendation to take a particular course of action. Please consult with your tax and financial professional regarding your personal situation prior to making any financial related decisions.  Waddell & Reed and its representatives do not offer tax advice.  (10/20)