2020 Year-End Planning

Jay D. Franklin CFA, CFP, FSA | Clarity Capital Advisors |

We would like to take this opportunity to wish our readers a happy and healthy Thanksgiving. Along with everybody else, we are looking forward to the end of 2020. Here are some financial items worthy of your consideration.

Required Minimum Distributions (RMDs): Yes, the CARES Act exempted us from having to take RMDs from our IRAs, but it still may be a good idea to take out some funds if your withdrawal will be taxed in a lower bracket. Doing so will lower the base used to calculate future year’s RMDs. Please be advised that you do not need to sell securities in your IRA to meet an RMD. You can simply transfer the assets to your taxable brokerage account. If you don’t need the money, please consider a qualified charitable distribution where the funds are paid directly to a charity and are excluded from your adjusted gross income rather than a below-the-line deduction. Another possibility would be a Roth conversion, assuming that funds outside the IRA are available to pay the resulting taxes. Again, this can be accomplished by transferring securities or cash to a Roth IRA.

Charitable Contributions: Another provision of the CARES Act allows a $300 above-the-line deduction for charitable contributions made in 2020. This deduction applies even if the taxpayer does not itemize deductions. For joint returns, the limit is $600. The contribution must be cash paid to a public charity rather than a private foundation or donor-advised fund. For our clients who need significant tax savings, we utilize donor-advised funds. These special accounts facilitate charitable contributions of appreciated securities while allowing the donor to maintain control of the disbursement of the funds over time.

Roth Conversions: The deadline for 2020 Roth conversions is December 31st. For people who find themselves in a lower tax bracket due to loss of income yet have substantial savings in a taxable account, a Roth conversion (moving cash or securities from a traditional/rollover IRA to a Roth IRA) may be advantageous. As a reminder, the full amount of the conversion is taxed as ordinary income. The plus side is that, on a going forward basis, those funds will be completely free of taxes for taxpayers and their heirs.

529 Plans: For most states, the 2020 contribution deadline for 529 College Savings Plans is December 31st. Recall that contributions to 529 plans are considered gifts for tax purposes, and the $15,000 annual gift tax exclusion applies. A married couple can contribute $30,000 per child and may even accelerate up to five years of gifting for $150,000. Funds in 529 plans grow tax-deferred and come out tax-free, providing they are used for educational purposes. We recommend 529 plans for our clients with children and grandchildren.

Capital Gains and Losses: If you still have any losses that you have not realized, you may want to take them before year-end. If you cannot use them to offset capital gains, then you will still receive a write-off against ordinary income up to $3,000 annually. On the other side of the coin, if you have large unrealized capital gains and are currently in a low capital gains tax bracket, it may be sensible to take some gains now rather than having to take them when you are in a higher tax bracket.

If you would like to discuss any of these items in more detail or learn more about our fee only, flat fee, retirement planning and asset management services, please do not hesitate to reach out to us at advisors@clarityca.com.