As investors wind down one of the most unpredictable years in recent memory, it's wise to consider potential tax implications stemming from the pandemic and the recent passage of the Coronavirus Aid, Relief and Economic Security, or CARES Act. Whether it's managing your investment accounts, deciding whether you'll take your required minimum distribution this year, or making the most of your 401(k) contributions before January 1, we've got you covered. Read on for some reminders on how the recent legislative changes may affect your end-of-the-year tax planning, plus some additional tips from a few of B. Riley Wealth Management's financial advisors.
Review Your Portfolio with Your Financial Advisor
If it has been a while since you last spoke with your financial advisor, give them a call and spend some time reviewing your portfolio. Check your investment accounts and asset allocation. Do you have a high percentage of capital too concentrated in a certain position or area? Determine what's working and what isn't, have your financial advisor evaluate how much risk you're carrying and, if necessary, have them rebalance your portfolio based on that information.
Carson Buell, one of our top financial advisors in Dallas, says investors should obtain a copy of their year-to-date (YTD) capital gains and losses reports. In assessing how your investments and funds are performing, it's likely you'll find that some of your holdings have incurred a loss, especially this year. As an investor, Buell says you are permitted to use any of those losses to offset any capital gains, plus, if you have an overall net loss, you can deduct up to an additional $3,000 against your ordinary earned income. Also, any unused capital losses may be carried forward for additional years, depending on the circumstances.
Of course, it is important to remember that there are stringent rules governing the sale of investments, including the wash sale rule, and this type of movement should not be done without the assistance of your financial advisor.
Decide Whether or Not You Will Take Your Required Minimum Distributions for 2020
Under normal circumstances, if you have inherited money or are 70½ years old (as of January 1, 2020) and using a retirement account or 401(k), the IRS requires that every year, you take a certain amount, or required minimum distribution (RMD), from that account. As an example, let's say you have a traditional tax-deferred retirement account or an inherited IRA (individual retirement account) from a deceased spouse or parent. The IRS requires you to take out a minimum amount every year and pay taxes on it, or face a penalty.
However, as the coronavirus pandemic derailed the economy in the second quarter of 2020, Congress passed the CARES Act, which set into motion additional changes to IRAs and required minimum distributions, the biggest one being the waiver of RMDs for the 2020 tax year. Still, whether or not you plan to take an RMD this year, it is worth noting that the SECURE Act, which was passed in December 2019, extended the RMD age to 72, enabling investors to contribute to investment accounts and IRAs for an extra year and a half. If you decide to take your RMD.
Consider A Roth IRA Conversion Plan
What is a Roth IRA Conversion? Based on your filing status and modified adjusted gross income (MAGI), it's possible you are no longer eligible for a Roth IRA in 2020. You cannot currently contribute to a Roth IRA if you make $139,000+ annually as a single person and $206,000+ if you're married. That said, as part of the 2017 Tax Cuts and Jobs Act, Congress lifted the income limit for Roth IRA conversions. What that means is, if you are under age 70½ but your income is too high for Roth contributions, you can now contribute to a traditional IRA and convert it to a Roth IRA using what is called the backdoor method.
Roth IRA conversions have also allowed some retirees to capitalize on the RMD waiver for 2020. Jason Beard and Bob Cellucci, two of our financial advisors in Philadelphia, note that "because people don't have to take their RMDs this year, we have clients who are pleased, because in doing so, they would have inadvertently found themselves in larger tax brackets given their overall loss of income due to the pandemic. They now have the option of taking that distribution and converting it into a Roth, which can create an opportunity to draw from a diverse set of funds and income streams well into retirement," they add.
Depending on your assets, either of these conversions may be worth it for you. Check with your financial advisor.
Max Out Your 401(k) and Employer-Sponsored Health Care Savings Accounts
If you have an employer 401 (k) account, make sure you maximize contributions, but try not to wait until December, if possible. It's better to spread them over a full 12 months, so you can avoid losing out on employer matching. In 2020, the total maximum 401(k) contribution amount allowed per year is $57,000 with a $19,500 cap on pre-tax contributions. If you are 50 or older, a "catch-up" amount of $6,500 is also allowed. Just make sure it happens prior to January 1.
Also, if you have employer-provided FSA or HSA plans with remaining funds, do your best to use them because, with few exceptions, remaining funds will not carry over to 2021. Consider making the maximum contribution amounts allowed for each during open enrollment, which ends on December 15, 2020. For HSA plans, the maximum pre-tax amount allowed is $3,600 for self-coverage and $7,200 for family coverage. For FSAs, the maximum contribution allowed remains unchanged from last year at $2,750. The more you can contribute up front, especially for HSAs, which are tax deductible, the better.
Review Your Insurance Plans, Including Life, Health, AD&D and Short-Term Disability
This applies to everyone, but especially to investors with employer-sponsored health care and insurance plans. For example, based on the previous year's medical expenses, should you switch to a more comprehensive health plan? If you've had a major life change, such as the birth of a child, a marriage, death of a family member, or a divorce, go over your health plan, FSA and HSA options carefully. It only takes one unexpected hospital stay to derail you financially.
JJ Feldman, a financial advisor who helps clients with life insurance plans
in Los Angeles, advises that investors should figure out whether additional
insurance coverage above what their employer provides is needed. "Find out
what's actually covered in employer-offered life, long-term, disability, AD&D, and short-term disability plans. You
may learn that you need supplemental or long-term care insurance in addition to
what you already have, especially as it pertains to life insurance," he adds.
Review Your Tax Withholdings and Determine If Adjustments are Needed
In early 2020, the IRS made changes to its online Tax Withholding Estimator, which is designed to help taxpayers predict what their tax bill may be this year. Are you an employee who needs to make an adjustment to the amount of money withheld from your paycheck based on contribution modifications? The new Tax Withholding Estimator offers a paycheck checkup. "If you are a business owner or self-employed, this tool provides a good way to try and estimate quarterly tax payments and plan ahead. Plus, the new estimator can now closely approximate the amount of refunds investors may receive based on customized tax amounts," says Rachel Pena, who advises institutional clients in the greater Nashville area.
Review Your Education Savings Plans
The 529 savings plan is one of the best ways to save for your child's schooling, and there are many types available, including 529 plans that will fund K-12 education, college and graduate school. As a parent, you have ownership of the account and can name your child as the beneficiary. There are no contribution limits, but if you put more than $15,000 in the account in any given year, you'll have to report it as a gift on your income taxes. If you're looking to fund your child's future education and can afford it, there is always an option to superfund a 529 plan.
Make Sure Your Emergency Liquidity Fund is Robust
"If investors have learned anything from the pandemic, it would be the importance of maintaining a liquid cash reserve aside from their investment portfolios, retirement accounts, and other assets," says Lisa Marcelli, a career financial advisor from Houston who has developed a specialty in guiding clients through various life changes for decades.
Unexpected emergencies do happen, Marcelli says, and insurance will cover certain things like temporary disability, but things like long-term job loss, natural disasters, pandemics, illness, or the sudden death of a family member can happen outside of what may or may not be covered. An emergency fund should cover at least six months of living expenses. There are several considerations when it comes to planning for an emergency fund, among them age, income, current investments, liquidity, and more, that you should discuss with your financial advisor.
Review Your Estate Plan
No matter your age or assets, your estate plan is something that should be reviewed on an ongoing basis, as should your living trust, will, and power of attorney. "If you've undergone any major life changes over the past year that require changes in beneficiary designations, like a marriage, divorce, or the death of a spouse or family member, there are adjustments you can make on your own during employee open enrollment, but for others, you may need to consult with your financial advisor as well as some attorneys and estate planning experts who can assist you. At least once a year, I remind my clients the importance of checking their trust funding, reviewing trustee and agent appointments, and going over any health care directives they may have (along with powers of attorney) in the rare case they become incapacitated," says David Gurievsky, a B. Riley Wealth Independent financial advisor based in Florida who assists clients with estate plans.
Prepare Charitable Donations
Charitable giving before the end of the year can increase your tax savings. Just make sure the amount of money you're donating will affect your tax bill. Review your itemized deductions (e.g., deductions for mortgage interest, property taxes, medical expenses, and of course, charitable contributions). If those deductions are more than the standard deductions, then charitable contributions may reduce your tax bill. You may want to consider IRA distributions for charitable donations. "Taxpayers age 70½ (as of January 1, 2020) or older should also remember they can exclude up to $100,000 of IRA distributions if those distributions were qualified charitable distributions," said Mike Gavett, a financial advisor who works with high net worth clients in Dallas.
As we close out what has been a truly unprecedented year, we hope that some of these tips and reminders will assist you as you finalize your financial planning for 2020. By taking these steps, you can expect to start 2021 on a positive note. For more information on maintaining a healthy financial portfolio, visit www.brileywealth.com
*B. Riley Wealth Management is not engaged in rendering legal, accounting or tax-preparation services. Specific questions as they relate to your situation should be directed to your legal and tax advisors.