As we suddenly find ourselves in the final quarter of 2020, now is a great time to review our finances before we are swept away with the activities that come with the holiday season – even if those activities will likely look very different this year. Regardless of your phase in life, there are opportunities to maximize your tax efficiencies and improve your long-term financial outlook by taking action now. Here are a few things to consider:
Make the most of taxable distributions
Certain retirement savings accounts, such as 401(k)s and Traditional IRAs, have Required Minimum Distributions (RMDs) beginning at age 72 (formerly 70 ½ before the SECURE Act passed earlier this year). However, for 2020 the requirement to take these distributions has been waived as part of the pandemic relief planning introduced with the CARES Act. Despite this temporary change, you may still want to take some amount of distribution from these accounts now if you can do so at a low marginal income tax bracket. If you delay taking money from these accounts this year, it likely will result in a higher RMD next year since the minimum distribution is calculated based on the balance on Dec. 31 of the previous year.
If you decide it makes sense to take a distribution from your IRA, but you don’t have a current need for that money, consider doing a Roth Conversion. With income tax rates at historic lows, you likely will benefit from paying taxes on distributions now and moving some of your savings into a Roth IRA that can continue to grow tax-free. Any future distributions also will be free from income taxes.
Another great way to utilize your RMD each year is with a Qualified Charitable Distribution (QCD). If you already plan to make charitable donations this year, doing so from your IRA can result in significant tax savings. As long as the charitable organization is “qualified,” and you make the contributions directly from your IRA to that organization, you will not owe any taxes on this distribution.
You should work with your CPA and financial advisor to review these potential strategies to make sure they make sense for you and are executed correctly.
Maximize tax-efficient savings
If you have not yet retired, your opportunities for tax-savings lie mostly in how and where you are saving. If you are not already maximizing your 401(k) savings, consider increasing your contributions, even if just by 1%. If you already are maxing out your 401(k) contributions, consider contributing to a Roth or doing back-door Roth contributions, depending on your income level.
An often-overlooked savings tool is the Health Savings Account (HSA) available to those with high-deductible health insurance plans. As we enter open enrollment season for health insurance, review your options and consider switching to a high-deductible plan if you aren’t already on one. If your plan is HSA-qualified, the maximum you can contribute in 2020 is $3,550 for individuals and $7,100 for families. Not only are the contributions and growth in these accounts tax-free, but the distributions also are exempt from taxes as long as they are used for qualified medical expenses.
Review your financial plan
It is a great practice to review and revise your financial plan once a year. Small course corrections over your lifetime can have huge long-term benefits. Take some time to revisit your financial goals, both short and long term, and assess whether or not you need to make any changes to achieve those goals. While you’re at it, it’s also a great time to look over your estate planning documents and make sure you haven’t experienced any life changes (death, birth, divorce, child reaching age of majority) that may require updates to your documents.
Assess and adjust your investments
Last but not least, now is a great time to review your investments and see if you need to make any changes. If you haven’t already rebalanced your accounts to your desired asset mix this year, consider doing so. You also may want to revisit your current asset mix to make sure it is still appropriate for your life stage. For instance, if you are quickly approaching retirement, you might want to consider dialing back the portion of your portfolio invested in equities as you prepare to begin making distributions to replace your paycheck.
Feeling overwhelmed? You don’t need to take on these tasks alone. If you need help reviewing and implementing a financial plan that will not only benefit you this year, but for many years to come, please request a consultation with one of our financial planners today.