Addressing the SECURE & CARES Acts
This year, we’ve been discussing the recent changes enacted by the SECURE and CARES Acts with clients and helping them identify where it makes sense to take advantage of various provisions of the laws. Here are some of the more common strategies we’ve been considering with our clients:
- Waive 2020 IRA Required Minimum Distributions (RMDs): The CARES Act allows all IRA owners to waive RMDs for tax year 2020, avoiding taxable distributions and keeping more money in your IRA growing tax-deferred. If you already took an RMD this year, contact us. You may still be able to use the 60-day IRA rollover rule to return unneeded distributions back to your IRA.
- Roth IRA Conversions: Because the SECURE Act ended the opportunity for a “stretch” in distributions to an inheritor of an IRA, inheriting a tax-free Roth IRA is now even more attractive than a traditional tax-deferred IRA. While a conversion from a regular IRA to a Roth IRA does create current taxable income on the amount converted, all future earnings will be tax-free. If you intend to leave IRA money to the next generation, it may make sense to start converting traditional IRA money into a Roth IRA.
- Update Charitable Giving Plans: Our clients who want to revise their giving plans in light of COVID-19 are benefiting from gifting rules this year. The CARES Act now allows each individual to deduct up to $300 in cash contributions, whether or not they itemize.
- Explore Other Planning Opportunities: Given that each individual, family, or organization’s situation is unique, it is worthwhile to have a conversation so we can uncover other opportunities made possible by recent law changes (such as deferring tax or loan payments, applying for business loans, refinancing, reviewing beneficiaries, contributing to retirement plans, and more).
Tax Planning for All Seasons
As part of our tax sensitivity in managing investment portfolios, we regularly look for opportunities to maximize after-tax portfolio returns beyond investment selection, allocation, and periodic rebalancing. We utilize these techniques in our client portfolios:
- We try to hold investments in taxable accounts for more than one year before selling them so that long-term capital gains rates will apply. The tax difference can be significant. (However, we always assess the potential risk and return tradeoffs that result from any decision to extend an investment holding period.)
- We seek to place the interest-earning portion of portfolios in tax-deferred accounts given interest income is taxed at the top marginal rate, unlike long-term capital gains.
- We consider carefully before selling investments with large built-in gains, unless the sale is justified by a higher expected return from an alternative investment or is necessary to maintain portfolio asset allocation objectives.
- When raising cash in your portfolio, we do so by selecting securities or individual lots of a security that have the lowest taxable gain consequences.
- During market volatility throughout the year, as well as regularly during our year-end review, we look for opportunities to “harvest” capital losses. These realized losses can then be used to offset realized gains elsewhere within or outside the portfolio, and within the same tax year or rolled forward to future tax returns. In either case, proceeds can be placed in a comparable investment so the portfolio allocation remains intact.
- For portfolios without significant tax-deferred assets, we will generally recommend holding tax-exempt bonds in lieu of taxable bonds, depending on the client’s marginal tax rate.
There is also a short list of almost timeless tax-wise practices to always stay aware of, which we try to highlight to our clients each year around this time:
- Maximize the use of tax-deductible retirement plan contributions each year to lower your tax liability as much as possible. The SECURE Act now permits savers to continue contributions to IRAs even after age 70½.
- Make annual or one-time gifts to family members to remove taxable income from your portfolio, potentially reduce family-wide tax liability, and reduce your taxable estate during your lifetime.
- Gift appreciated securities held for more than one year directly to charities or to a charitable donor-advised fund (DAF). The tax deduction is for the value of the gift, and taxes on any built-in capital gains are eliminated.
- Concentrate multiple years of charitable deductions into one year to maximize the tax benefits of giving, using the technique of “charitable bunching.”
- For those over age 70½, we can help you process qualified charitable distributions (QCDs) from IRAs, especially if you would not otherwise receive as advantageous a tax deduction for gifting taxable assets.
- Consider a Roth IRA or Roth 401(k) conversion or even discretionary distributions of IRA assets, especially if this will be a low-income-tax-rate year for you. If you have not already begun taking RMDs from IRAs, one strategy we often recommend is to reduce or eliminate your traditional IRA assets before they kick in.
What to Revisit For 2021
Many planning techniques, including those necessitated by the SECURE and CARES Acts, may need to be executed over multiple years. It is important to check in with your Wealth Advisor to review the recent law changes in light of your situation. It is also the case that political developments may result in tax-law changes as soon as next year or in years to come. With this backdrop we are attentive to incorporating flexibility where possible into our planning.
Final Thoughts
We welcome the opportunity to discuss these planning topics with our clients and to coordinate with tax advisors to determine the best techniques for each tax profile. Please contact your Litman Gregory Advisor for more information and to review your situation.
Note: As with all tax planning, every person’s tax situation is different. We suggest consulting with your tax advisor before implementing any of these tax planning techniques.