We said last month that retirees are one of the highest and most unfairly taxed groups out there and stressed the importance of tax reduction planning when it comes to investments and retirement. While the SECURE Act passed last December is certainly a huge negative to retirement savers from a tax perspective, the recently passed $2 trillion COVID-19 stimulus package offers many great tax planning opportunities.
In 2009 after stocks had taken a beating in 2008 the government waived RMDs (required minimum distributions) and they are now doing it again for 2020. So, if you are over age 72 you won’t be forced to sell investments out of your IRA or 401k and withdraw them if you don’t want to.
For those that don’t need some or all of their RMD for income this creates an opportunity to reduce future taxes if you normally just reinvest these forced withdraws. Normally when these withdraws come out of an IRA or 401k you must pay tax on the withdraw and then if you reinvest the money into a taxable investment account you must then pay taxes on dividends, capital gains, and/or interest the money earns every year moving forward.
This year instead of taking the money out and then reinvesting it into an account that has taxes associated with it forever, you could instead take the money and convert it over to a Roth where there won’t be any taxes on any gains or withdraws in the future. Normally you can NOT take any money that you are forced to take out as an RMD and reinvest it into a Roth. You can only take out more money above and beyond this forced withdraw amount and convert it to a Roth. With the COVID-19 stimulus this has now changed and any and all money that comes out of an IRA or 401k could be converted to a tax free Roth regardless of age or income.
COVID-19 has certainly brought about some painful changes for many, but as it is with most situations there is usually a way to turn lemons into lemonade. The RMD Holiday is just one of many tax planning opportunities the new stimulus package brings with it.
Material discussed is meant for general/informational purposes and is not intended to be used as the sole basis for any financial decisions, nor be construed as advice to meet your particular needs. Please consult a financial professional for further information.
If you are interested in finding out what tax planning opportunities there might be for your personal situation in the recently passed stimulus package call The Retirement Team in Topeka a call at 785-228-0222.