Important Information for Tax Season 2020

Contributed by: Lauren Adams, CFA®, CFP®

As we prepare for tax season, we want to keep you apprised of when you can expect to receive your tax documentation from Raymond James.

2020 Form 1099 mailing schedule

• January 31 – Mailing of Form 1099-Q and Retirement Tax Packages

• February 15 – Mailing of original Form 1099s

• February 28 – Begin mailing delayed and amended Form 1099s

• March 15 – Final mailing of any remaining delayed original Form 1099s

Additional important information

Delayed Form 1099s

In an effort to capture delayed data on original Form 1099s, the IRS allows custodians (including Raymond James) to extend the mailing date until March 15, 2021, for clients who hold particular investments or who have had specific taxable events occur. Examples of delayed information include:

• Income reallocation related to mutual funds, real estate investment, unit investment, grantor and royalty trusts, as well as holding company depositary receipts

• Processing of original issue discount and mortgage-backed bonds

• Expected cost basis adjustments including, but not limited to, accounts holding certain types of fixed income securities and options

If you do have a delayed Form 1099, we may be able to generate a preliminary statement for you for informational purposes only, as the form is subject to change.

Amended Form 1099s

Even after delaying your Form 1099, please be aware that adjustments to your Form 1099 are still possible. Raymond James is required by the IRS to produce an amended Form 1099 if notice of such an adjustment is received after the original Form 1099 has been produced. There is no cutoff or deadline for amended Form 1099 statements. The following are some examples of reasons for amended Form 1099s:

• Income reallocation

• Adjustments to cost basis (due to the Economic Stabilization Act of 2008)

• Changes made by mutual fund companies related to foreign withholding

• Tax-exempt payments subject to alternative minimum tax

• Any portion of distributions derived from U.S. Treasury obligations

What can you do?

You should consider talking to your tax professional about whether it makes sense to file an extension with the IRS to give you additional time to file your tax return, particularly if you held any of the aforementioned securities during 2020.

If you receive an amended Form 1099 after you have already filed your tax return, you should consult with your tax professional about the requirements to re-file based on your individual tax circumstances.

You can find additional information here.

As you complete your taxes for this year, a copy of your tax return is one of the most powerful financial planning information tools we have. Whenever possible, we request that you send a copy of your return to your financial planner, associate financial planner, or client service associate upon filing. Thank you for your assistance in providing this information, which enhances our services to you.

We hope you find this additional information helpful. Please call us if you have any questions or concerns about the upcoming tax season.

Lauren Adams, CFA®, CFP®, is a CERTIFIED FINANCIAL PLANNER™ professional and Director of Operations at Center for Financial Planning, Inc.® She works with clients and their families to achieve their financial planning goals and also leads the client service, marketing, finance, and human resources departments.

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Please note, changes in tax laws or regulations may occur at any time and could substantially impact your situation. Raymond James financial advisors do not render advice on tax or legal matters. You should discuss any tax or legal matters with the appropriate professional.

How to Decide Where to Live in Retirement

Contributed by: Sandra Adams, CFP®

One of the issues for most retirees, once you have determined that you are ready to retire and can afford to do so, is where you want to live in retirement? This, of course, is a loaded question. There are so many factors that go into making this decision, and it is as much emotional as it is financial. I could certainly write a detailed commentary on this topic, but here we will provide some bullet points to provide some issues and decision points to consider.

Location, Location, Location.  For the majority of people, the most important decision in making the retirement living decision is the location. Will you remain in your pre-retirement community that you are familiar with?  Where are your friends, connections and social contacts?  Or will you make a change, perhaps to a different or warmer climate? To a more rural setting?  Or maybe closer to the city where health care, transportation, resources and cultural activities are more accessible?  You may decide to move closer to family at this point in your life — this may be a dangerous proposition — as growing and maturing families tend to move again just as you move to be near them, leaving you again stranded in a place where you know no one.  You may find that it is more important to find a location where you can be near friends that you can socialize with, that you have commonalities with and that will provide mutual support.

Once the location is determined, the physical space becomes important.  Will you stay in the same home you’ve always lived in and “age in place”?  If you decide to do that, it may become necessary to take a good hard look at your home and make sure that it is equipped to be safe and easy for you to live in for the next 20 – 30 years or so of your retirement, if that is your plan. And if you truly do wish to stay in your own home to age (according to a recent survey by the National Council on Aging, 9 in 10 seniors plans to stay in their own home to age), you have to plan ahead to make things as safe and accommodating for yourself and your spouse as possible, so there is not a need for you to need to move to an assisted living or nursing care facility in the unfortunate case that you have a medical emergency and your home is not equipped for you to stay there.  

For those who don’t desire to stay in their pre-retirement home, there are endless choices:

• You might decide to downsize to a smaller home, condo or apartment.

• You might choose to move into a senior-only community so that you can associate with people that are in the same life situation.

• You might choose to live in a multi-generational planned community.

• You might choose to live in a shared home situation — think of older adults sharing the same living space, expenses, and providing support and resources with one another (circa the Golden Girls).

• You might decide to move in with or share space with family members.

So, how do you go about making your decision about where and in what kind of house/housing facility to live in retirement?      

• Develop your criteria – What kind of climate are you looking for?  How active do you want your social life to be? What kind of access do you want to health care and other facilities? Make a list and search locations that fit your criteria.

• Identify neutral professionals to guide you

• Do a trial run

• Consult your family

• Put together a transition team

To move or not to move, that is the question.  And even making not to move — aging in place — does not mean that there are no choices or changes to make.  But if you do decide to make a move, it is a process that takes planning, and one that should not be taken lightly. Give the process serious consideration — it is a large part of your potential retirement planning picture.

Sandra Adams, CFP®, is a Partner and CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® and holds a CeFT™ designation. She specializes in Elder Care Financial Planning and serves as a trusted source for national publications, including The Wall Street Journal, Research Magazine, and Journal of Financial Planning.

Retirement Plan Contribution and Eligibility Limits for 2021

Contributed by: Robert Ingram, CFP®

For the New Year, the IRS had released its updated figures for retirement account contribution and income eligibility limits.  While most contribution limits remain unchanged from 2020, there are some small adjustments for 2021 certainly worth noting. 

Employer retirement plan contribution limits stay largely the same (401k, 403b, 457, and Thrift Savings)

• $19,500 annual employee elective deferral contribution limit (same as 2020)

• $6,000 “catch-up” contribution if over the age of 50 (same as 2020)

• The total amount that can be contributed to the defined contribution plan including all contribution types (e.g. employee deferrals, employer matching, and profit-sharing) is $58,000 or $64,500 if over the age of 50 (increased from $57,000 or $63,500 for age 50+ in 2020)

Traditional, Roth, SIMPLE, and SEP IRA contribution limits

• $6,000 annual employee elective deferral contribution limit (same as 2020)

• $6,000 “catch-up” contribution if over the age of 50 (same as 2020)

Traditional IRA deductibility income limits

Contributions to a traditional IRA may or may not be tax-deductible depending on your tax filing status, whether you are covered by a retirement plan through your employer, and your Modified Adjusted Gross Income (MAGI). The amount of a traditional IRA contribution that is deductible is reduced or “phased out” as your MAGI approaches the upper limits of the phase-out range. For example:

Single Filer

• Covered under a plan

• Partial deduction phase-out begins at $66,000 up to $76,000 (then above this no deduction) compared to 2020 (phase-out: $65,000 to $75,000)

Married filing jointly

• Spouse contributing to the IRA is covered under a plan

• Phase-out begins at $105,000 to $125,000 (compared to 2020: $104,000 to $124,000)

• Spouse contributing is not covered by a plan, but other spouse is covered under the plan

• Phase-out begins at $198,000 to $208,000 (compared to 2020: $196,000 to $206,000)

Roth IRA contribution income limits

Similar to making deductible contributions to a traditional IRA, being eligible to contribute up to the maximum contribution to a Roth IRA depends on your tax filing status and your MAGI. Your allowable contribution is reduced or "phased out" as your MAGI approaches the upper limits of the phase-out range. For 2021 the limits are as follows:

Single filer

• Partial contribution phase-out begins at $125,000 to $140,000 (compared to 2020: $124,000 to $139,000)

Married filing jointly

• Phase-out begins at $198,000 to $208,000 (compared to 2020: $196,000 to $206,000)

• If your income is over the limit and you cannot make a regular annual contribution, using a Roth IRA Conversion in different ways may be an appropriate strategy depending on your circumstances.

As we begin 2021, keep these updated figures on your radar when reviewing your retirement savings opportunities and updating your financial plan. However, as always, if you have any questions surrounding these changes, don’t hesitate to reach out to our team!

Have a happy and healthy New Year!

Robert Ingram, CFP®, is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® With more than 15 years of industry experience, he is a trusted source for local media outlets and frequent contributor to The Center’s “Money Centered” blog.

2 Easy Ways To Determine If Your 401k Is Too Aggressive

Contributed by: Matt Trujillo, CFP®

For the investor who’s unsure of how their retirement plan works…here are two easy ways to measure how aggressive or conservative your 401k is.

1. Determine your stock-to-bond ratio.

Most custodians offer a pie chart with this information. Login to your 401k account to view the percentage of your money that is invested in stocks and how much is in bonds. In general, it’s aggressive to invest 70% or more in stocks. Once you know your level of risk you should understand if you can handle the ups and downs of that risk emotionally, and also how much risk your long-term planning calls for. 

2. Check your balance at the end of each month.

For example, if an investor’s account jumped from $100K to $110K (10% growth in a month) then they probably have invested most of their money in stocks. This will feel great when things are going up, but that investor needs to be prepared to see some significant paper losses when we experience a downturn like what we just saw in March and April.

So, how can an investor strike a good balance? And when should an allocation change from aggressive to conservative?

As you get closer to taking distributions, it’s reasonable to scale back your stock exposure and move money into safe havens like highly rated corporate bonds and treasury bonds. I say “taking distributions” instead of “retirement” because your plan should be based on when distributions begin. Retirement is a type of distribution event, but not necessarily the only one.

However, if a client has most of their income needs satisfied from other sources and has the emotional appetite to handle the swings, I can see them continuing a more aggressive allocation even in retirement (70% or more in stocks). However, if a client is relying heavily on their portfolio then generally a more conservative allocation is recommended (50% or less in stocks).

Matthew Trujillo, CFP®, is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® A frequent blog contributor on topics related to financial planning and investment, he has more than a decade of industry experience.

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401(k) plans are long-term retirement savings vehicles. Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification and asset allocation. Every investor's situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Prior to making an investment decision, please consult with your financial advisor about your individual situation.

How to Finish Financially Strong in 2020

No one could have predicted what 2020 had to offer. The stock market saw wild swings that hadn’t occurred since the 2008 recession. Concerns over Iranian tensions and an oil war quickly took a backseat as Covid 19 spread across the world. Many other notable things happened this year, but let’s discuss how you can end the year financially strong.

Here are the top 8 tips from our financial advisors.

1. Consider rebalancing your portfolio.

The stock market’s major recovery since March may have left your portfolio overweight in some areas or underweight in others. Be sure that you’re taking on the correct amount of risk by rebalancing your long-term asset allocation.

2. Assess your financial goals.

Starting now, assess where you are with the financial goals you’ve set for yourself. Take the necessary steps to help meet your goals before year-end so that you can begin 2021 with a clean slate.

3. Know the estate tax rules.

For those with estates over $5M, be sure to review your potential estate tax exposure under both a Republican and Democrat administration.

4. Review your employer benefits package and retirement plan.

Open enrollment runs from Nov. 1 through Dec. 15. Review your open enrollment benefit package and your employer retirement plan. Don’t gloss over areas such as Group Life and Disability Elections as most Americans are vastly underinsured. Many 401k plans now offer an “auto increase” feature which can increase your contribution 1% each year until the contribution level hits 15%, for example.  

5. Take advantage of tax planning opportunities.

Such as tax-loss harvesting in after-tax investment accounts or Roth IRA conversions. Many folks have a lower income in 2020 which could present an opportunity to move some money from a traditional IRA to a Roth IRA while in a slightly lower tax bracket.

6. Boost your cash reserves.

It’s so important to have cash savings to cover unexpected expenses or income loss. Having a solid emergency fund can prevent you from having to sell investments in a down market or from taking on high-interest debt. Ideally, families with two working spouses should have enough cash to cover at least 3 months of expenses. While single income households should have cash to cover six months. Take the opportunity to review your budget and challenge yourself to find additional savings each week through year-end.

7. Contribute more to your retirement plan.

Increase your retirement account contributions for long-term savings, great tax benefits, and free money (aka an employer match).

Contributions you make to an employer pre-tax 401k or 403b are excluded from your taxable income and can grow tax-deferred. Roth account contributions are made after-tax but can grow tax-free.

If your employer plan and financial situation allow for it, you can accelerate your savings from now until the end of the year by setting your contribution level to a high percentage of your income.  Many employers allow you to contribute up to 100% of your pay.

8. Give to charity.

Is there a charity you would like to support? Make a charitable donation! Salvation Army and Toys for Tots are popular around this time.

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of the author and not necessarily those of Raymond James. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Rebalancing a non-retirement account could be a taxable event that may increase your tax liability. Conversions from IRA to Roth may be subject to its own five-year holding period. Unless certain criteria are met, Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals of contributions along with any earnings are permitted. Converting a traditional IRA into a Roth IRA has tax implications. Investors should consult a tax advisor before deciding to do a conversion. Matching contributions from your employer may be subject to a vesting schedule. Please consult with your financial advisor for more information. 401(k) plans are long-term retirement savings vehicles. Withdrawal of pre-tax contributions and/or earnings will be subject to ordinary income tax and, if taken prior to age 59 1/2, may be subject to a 10% federal tax penalty. Contributions to a Roth 401(k) are never tax deductible, but if certain conditions are met, distributions will be completely income tax free. Unlike Roth IRAs, Roth 401(k) participants are subject to required minimum distributions at age 72.

Will Social Security Recipients Get A Raise In 2021?

Contributed by: Kali Hassinger, CFP®, CDFA®

Social Security benefits for nearly 64 million Americans will increase by 1.3% beginning in January 2021. The adjustment is calculated based on data from the Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI‐W, through the third quarter. This cost of living adjustment (COLA for short) is among one of the smallest received, other than when the adjustment was zero.

The Social Security taxable wage base will increase to $142,800 for 2021, which is a 3.7% increase from $137,700 in 2020. This means that employees will pay 6.2% of Social Security tax on the first $142,800 earned, which translates to $8,854 of tax. Employers match the employee amount with an equal contribution. The Medicare tax remains at 1.45% on all income, with an additional surtax for individuals earning over $200,00 and married couples filing jointly who earn over $250,000.

Medicare premium increases have not yet been announced, but trustees are estimating Part B premiums will increase by about $9 or less per month for those not subject to the income‐related surcharge. Unfortunately, the Social Security COLA adjustment is often partially or completely wiped out by the increase in Medicare premiums.

For many, Social Security is one of the only forms of guaranteed fixed income that will rise over the course of retirement. The Senior Citizens League estimates, however, that Social Security benefits have lost approximately 33% of their buying power since the year 2000. This is why, when working to run retirement spending and safety projections, we factor an erosion of Social Security’s purchasing power into our clients’ financial plans.

Kali Hassinger, CFP®, CDFA®, is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® She has more than a decade of financial planning and insurance industry experience.

Why COVID-19 Has Clients Postponing Retirement

Contributed by: Sandra Adams, CFP®

Going into 2020, none of us had any idea what we were in for. The coronavirus came upon us like an unanticipated hurricane. It is sticking around much longer than anticipated and is threatening to be around indefinitely. Many of us are on the verge of “pandemic fatigue”! While some have felt a short-term economic impact, any longer-term impacts will likely show themselves later.

For most clients nearing retirement, their goals are very much on track given the minimal impact of the virus on investment markets, employment, and savings SO FAR in 2020. However, the bigger concern for most clients looking at retirement is what their actual retired life may look like in the new world of COVID-19. 

Many clients have been living in a world of quarantine. They are working remotely, socializing less, and communicating mostly via phone/video. The new world lacks the pleasures of travel, dining out, and group events. While this eases the budget, it’s not the life anyone desires to live every day in retirement. The retirement dream that clients work so hard to achieve is one in which they are traveling, visiting family, socializing with friends, volunteering, pursuing hobbies outside of the home, maybe taking classes, and/or pursuing a new job or career. Generally, none of these are activities that will be COVID-compliant, at least until the virus is under control or a vaccine is developed. For this reason, several clients have expressed the desire to delay their retirement date and continue working if we are still living in a COVID world. After all, “Why would I want to retire and sit at home in quarantine?”

As long as clients are working towards retirement, important financial goals should be:

• Continue contributions to employer retirement plans

• Build reserve savings to serve as a startup for future retirement cash flow

• Carefully track budget cash flow to make sure you have a good sense of what you will need for retirement income

• Reduce debt as much as possible before retirement

Its times like this that I’m reminded that for many, the non-financial side of the retirement decision is just as important as the financial side. 

If you or someone you know is approaching retirement and would benefit from having a conversation with one of our financial planners, please let us know. We are always happy to help!

Sandra Adams, CFP®, is a Partner and CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® and holds a CeFT™ designation. She specializes in Elder Care Financial Planning and serves as a trusted source for national publications, including The Wall Street Journal, Research Magazine, and Journal of Financial Planning.

Are Your Employer Benefits Meeting Your Needs?

Contributed by: Robert Ingram, CFP®

Fall is upon us, but just around the corner is the 2021 Open Enrollment Period. The window to select next year’s benefits at your employer runs from Nov. 1st through Dec. 15th. In the past, you may not have given these selections much thought, but this year, the impact of COVID-19 may have you thinking about the many “What if...” situations. Like, “What happens if my family and I get sick?” or “What happens if I'm out of work for a long time?” Understanding your options helps ensure that you're taking full advantage of the insurance plans and other benefits. Here are 5 reasons you should review your benefits and coverages:

1. Do you have the right health insurance coverage?

Most employer health and wellness benefits have at least a couple of health insurance options, such as PPO or HMO plans. Today, available choices usually include a type of High Deductible Health Plan (HDHP) eligible for a Health Savings Account (HSA). With a higher deductible, you will be responsible for a greater amount of medical costs out-of-pocket before the insurance plan begins to pay (compared to a more traditional lower-deductible plan). In addition to the opportunity to contribute to an HSA, the higher deductible plans usually have lower premiums than plans with lower deductibles. However, you should focus on the total potential costs, including premiums, deductibles, co-pays, and annual out-of-pocket maximums. 

When deciding which plan makes the most sense, you would normally consider your health history and the services you might expect to use. Generally, the greater your expected medical costs each year, the more likely you benefit from a lower deductible plan. You also should consider how you want to manage your health care (are you comfortable staying within a specific network of doctors and hospitals, or do you want greater flexibility?). Some health plans, for example, will require higher co-pays for services provided outside of their direct network.

The COVID-19 pandemic has made it even more important to understand your coverage options and make decisions accordingly. Some questions to ask when evaluating insurance plans could include:

• If I get sick and need treatment, what restrictions does the plan have on services? What hospitals or outpatient facilities can I use?

• Are there any deductibles waivers for COVID-related services or office visits?

• How does prescription drug coverage handle any special treatments or therapeutics?

2. Do you need to add young adult children to your health insurance plan?

Under the Affordable Care Act, health plans that offer dependent child coverage must allow children to be covered under the parent’s family plan until they reach age 26. With the widespread disruptions in the economy, many young adults may have lost their employer coverage or face other cost-prohibitive options. 

On plans that cover dependents, you can add your child under age 26 to your plan as a dependent even if he or she:

• is not living with you

• is not financially dependent on you

• is married

• is eligible to enroll in their own insurance plan

3. Strengthen your life insurance and disability insurance protections.

Employer benefit plans offering life insurance typically provide a basic amount of coverage at no additional cost to you, such as an amount equal to your base salary. Many plans will allow you to purchase additional coverage (supplemental life insurance) up to a maximum dollar amount or a multiple of your salary, for example, up to five times your salary.  

Often there is additional spousal coverage you can purchase as well.

While the supplemental and spousal insurance has an extra cost that can increase as the employee/spouse ages, employer group insurance tends to be less costly than individual policies and can provide a good base of coverage. When considering your life insurance needs, here are some tips.

Many employers also provide a group disability insurance benefit. This can include short-term coverage (typically covering up to 90 or 180 days) and/or long-term disability (covering a specified number of years or up through a certain age such as 65). Disability benefits often cover a base percentage of income such as 50% or 60% of salary, many times at no cost with some plans offering supplemental coverage for an additional premium charge.   

As with the life insurance benefits, group disability may not completely replace your lost income, but it can provide a solid foundation of coverage that you should maximize.

4. Your retirement plan (401k, 403b, etc.) might need a tune-up.

Start with contributions to your account. 

• Are you contributing up to the maximum employer match, if offered? Take advantage of free money!

• Are you making the maximum annual contribution (elective deferral)? The basic limit was $19,500 in 2020.

• If you can save more after maximizing your elective deferrals, does your plan offer separate after-tax contributions? This could be a way to leverage additional Roth IRA conversion opportunities.

Review your investment allocation. Do you have the appropriate balance of stocks, bonds, cash, and other asset categories in your portfolio given your timeframe and tolerance for risk? After experiencing the plunging financial markets of March and the sharp rebound in the stock market through the summer, you may have concentrations in certain assets that are above or below your desired target. This could be a good time to rebalance your portfolio back to those targets.

5. Michigan’s auto insurance no-fault law changed in July.

Okay, while your auto insurance is probably not part of your employer group benefits, now would be a good time to review your auto insurance coverage along with your other benefits. 

Earlier this July, legislation went into effect here in Michigan that changed the no-fault insurance law. One of the main changes related to Personal Injury Protection (PIP) is the part covering medical bills and lost wages if you are injured in an accident. Residents can now select different levels of PIP, whereas Michigan law had previously required insurance covering unlimited medical benefits for the lifetime of the injured person. Read more about the Michigan insurance reform.

If your policy has been renewed since July 1st, you may have chosen a specific PIP level or continued a default option for unlimited coverage. Selecting a lower level of PIP can lower your premiums depending on the limit you choose. However, it's important to note that carrying a higher level of protection could still make sense for many people and could be worth the extra cost. 

Having a conversation with your insurance agent and financial advisor about the potential risks versus cost savings can help you decide if changes to your policy are appropriate. 

As always, if we can be a resource for you, please let us know. 

Robert Ingram, CFP®, is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® With more than 15 years of industry experience, he is a trusted source for local media outlets and frequent contributor to The Center’s “Money Centered” blog.

Do You Know Why 2020 Is A Critical Year For Tax Planning?

Contributed by: Nick Defenthaler, CFP®, RICP®

It’s been quite the year, hasn’t it? 2020 has certainly kicked off the decade in an interesting fashion. In addition to the coronavirus quarantine, it’s also a year that required a significant amount of tax planning and forward-thinking. Why is this year so unique as it relates to taxes? Great question, let's dive in!

SECURE Act

The SECURE ACT was passed in late December 2019 and became effective in 2020. The most meaningful part of the SECURE Act was the elimination of the stretch IRA provision for most non-spouse IRA beneficiaries. Non-spouse beneficiaries now only have a 10-year window to deplete the account which will likely result in the beneficiary being thrust into a higher tax bracket. This update has made many retirees re-think their distribution planning strategy as well as reconsider who they are naming as beneficiaries on certain accounts, given the beneficiary’s current and future tax bracket. Click HERE to read more about this change. 

CARES Act 

Fast forward to March, the CARES Act was passed. This critical stimulus bill provided direct payments to most Americans, extended and increased unemployment benefits, and outlined the parameters for the Paycheck Protection Program for small business relief. Also, another important aspect of the CARES Act was the suspension of Required Minimum Distributions (RMDs) for 2020. This isn’t the first time this has occurred. Back in 2009, RMDs were suspended to provide relief for retirees given the “Great Recession” and financial crisis. However, the reality is that for most Americans who are over 70 1/2 and subject to RMDs (RMDs now begin at age 72 starting in 2020 due to the SECURE Act), actually need the distributions for cash flow purposes. That said, for those retirees who have other income sources (ex. Social Security, large pensions, etc.) and investment accounts to cover cash flow and don’t necessarily “need” their RMD for the year for cash flow, 2020 presents a unique planning opportunity. Not having the RMD from your IRA or 401k flow through to your tax return as income could reduce your overall income tax bracket and also lower your future Medicare premiums (Part B & D premiums are based on your Modified Adjusted Gross Income). We have seen plenty of cases, however, that still make the case for the client to take their RMD or at least a portion of it given their current and projected future tax bracket. There is certainly no “one size fits all” approach with this one and coordination with your financial planner and tax professional is ideal to ensure the best strategy is employed for you. 

Lower Income In 2020

Income for many Americans is lower this year for a myriad of reasons. For those clients still working, it could be due to a pay cut, furlough, or layoff. Unfortunately, we have received several dozen calls and e-mails from clients informing us that they have been affected by one of the aforementioned events. In anomaly years where income is much less than the norm, it presents an opportunity to accelerate income (typically though IRA distributions, Roth IRA conversions, or capital gain harvesting). Every situation is unique so you should chat with your planner about these strategies if you have unfortunately seen a meaningful reduction in pay. 

Thankfully, the market has seen an incredible recovery since mid-March and most diversified portfolios are very close to their January 1st starting balances. However, income generated in after-tax investment accounts through dividends and interest are down a bit given dividend cuts by large corporations and because of our historically low interest rate environment. We were also were very proactive in March and April with a strategy known as tax-loss harvesting, so your capital gain exposure may be muted this year. Many folks will even have losses to carry over into 2021 and beyond which can help offset other forms of income. For these reasons, accelerating income could also be something to consider. 

Higher Tax Rates In 2021, A Very Possible Scenario 

Given current polling numbers, a Democratic sweep seems like a plausible outcome. If this occurs, many analysts are predicting that current, historically low rates could expire effective January 1, 2021. We obviously won’t know how this plays out until November, but if tax rates are expected to see a meaningful increase from where there are now, accelerating income should be explored. Converting money from a Traditional IRA to a Roth IRA or moving funds from a pre-tax, Traditional IRA to an after-tax investment account (assuming you are over the age of 59 1/2 to avoid a 10% early withdrawal penalty) eliminates the future uncertainty of the taxes on those dollars converted or distributed. Ever since the Tax Cuts and Jobs Act was passed in late 2017 and went into law in 2018, we have been taking a close look at these strategies for clients as the low tax rates are set to expire on January 1, 2026. However, if taxes have a very real chance of going back to higher levels as soon as 2021, a more aggressive income acceleration plan could be prudent. 

As you can see, there have been many moving parts and items to consider related to tax planning for 2020. While we spend a great deal of our time managing the investments within your portfolio, our team is also looking at how all of these new laws and ever-changing tax landscape can impact your wealth as well. In our opinion, good tax planning doesn’t mean getting your current year’s tax liability as low as humanly possible. It’s about looking at many different aspects of your plan, including your current income, philanthropy goals, future income, and tax considerations as well as considering the individuals or organizations that will one day inherit your wealth and helping you pay the least amount of tax over your entire lifetime.

Nick Defenthaler, CFP®, RICP®, is a Partner and CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® Nick specializes in tax-efficient retirement income and distribution planning for clients and serves as a trusted source for local and national media publications, including WXYZ, PBS, CNBC, MSN Money, Financial Planning Magazine and OnWallStreet.com.

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All investments are subject to risk. There is no assurance that any investment strategy will be successful. Unless certain criteria are met, Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted. Additionally, each converted amount may be subject to its own five-year holding period. Converting a traditional IRA into a Roth IRA has tax implications. Investors should consult a tax advisor before deciding to do a conversion. Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.

What You Need to Know About the RMDs Deadline Extension

Contributed by: Robert Ingram, CFP®

To combat the economic impact of COVID-19, Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act on March 27, 2020.  The more than 2 trillion dollar stimulus package contained numerous provisions including an expansion of unemployment benefits, tax credit direct payments to qualified individuals, financial support to small businesses/healthcare facilities/state and local governments, and some changes to retirement account rules.  One of the provisions affecting retirement accounts was to suspend Required Minimum Distributions (RMDs) for 2020.  Individuals subject to RMDs for qualified retirement plans such as 401(k), 403(b) and IRA accounts are not required to take distributions this year (including beneficiaries owning inherited IRAs who were still subject to annual RMDs).

What does this suspension of RMDs mean for individuals who have already taken distributions prior to the CARES Act, but would not have if given the choice? If you have taken a distribution before March 27 is there a way to reverse or ‘undo’ the distribution?

Expanding The 60-Day Rollover Window For 2020

A retirement account owner that takes possession of a distribution from the account has 60 days from the date of withdrawal to complete a rollover into another eligible retirement account, for example, a rollover to an IRA.  Doing so excludes the distribution from income that could be subject to taxes and penalties.  This is referred to as the 60-day rollover rule; the IRS allows this one time per 12-month period. Please note that the one time per year rule does NOT apply to direct rollovers such a direct 401(k) rollover to an IRA.

Individuals who took a retirement account distribution prior to March 27 and were still within the 60 days since taking the distribution could have used the 60-day rollover rule to put their distribution back into their respective accounts, classifying it as a rollover.  However, this window was very limited.

In April, the IRS issued the first notice of guidance extending the 60-day rollover rule in 2020:

What qualified?

Distributions taken on or after February 1, 2020 could be rolled over into the retirement account.

When must the distribution be rolled over into the retirement account?

The later of

1. 60 days after receiving the distribution

2. July 15, 2020

This provided greater flexibility for individuals that had taken an RMD after January 31.  However, it still did not cover those that received an RMD in January.  Individuals that had already completed a once per year 60-day rollover within the last 12-months would also have been ineligible to use this rollover rule again to reverse their RMD.  In addition, this rollover window would not apply to non-spouse beneficiaries with inherited IRA accounts, since rollovers are not allowed for those accounts.

IRS Extends Rollover Deadline For All RMDs Made In 2020 To August 31st

In June, the IRS issued further guidance that essentially allows all RMDs that have been taken in 2020 to be repaid.  This IRS notice 2020-51 does the following:

• Rollover deadline has been extended to August 31, 2020 and covers RMDs taken any time in 2020.  This allows those who have taken RMDs as early as January to put the funds back into their retirement accounts by rolling over the funds if it is completed by August 31st.

• This rollover to reverse RMDs taken in 2020 does not count as part of the once per year 60-day rollover. This would allow individuals to use the rollover to prepay their RMDs regardless of whether they had already used a 60-day rollover within the last 12 months.

• Provides an exception allowing non-spouse beneficiaries to return RMDs to their Inherited IRAs in 2020.

A couple of points of note when considering repaying your RMDs taken this year

• The IRS notice 2020-51 only applies to distributions representing your Required Minimum Distribution amount.  Distributions other than your RMD amounts would be subject to the once per year 60-day rollover rule.

• If you had federal or state taxes withheld when you took your required minimum distribution, these amounts cannot be reversed and returned from the federal or state treasuries.  You could return your total gross RMD back to your retirement account, but it would have to be made out-of-pocket.  Any excess withholding would be resolved next year when you file your 2020 tax returns.

While reversing this year’s required minimum distributions may provide some great benefits such as potentially lowering your taxable income in 2020 or allowing for a Roth IRA conversion as an alternative, everyone’s financial situation and tax planning needs are unique.  For some folks, it could make sense to take RMDs if they expect higher income in the future that could fall in a higher tax bracket, for example.

Having a good conversation with your advisors can help you decide what is right for you.  As always, if you have any questions, please don’t hesitate to reach out!

Robert Ingram, CFP®, is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® With more than 15 years of industry experience, he is a trusted source for local media outlets and frequent contributor to The Center’s “Money Centered” blog.

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The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Raymond James does not provide tax or legal services. Please discuss these matters with the appropriate professional. Conversions from IRA to Roth may be subject to its own five-year holding period. Unless certain criteria are met, Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals of contributions along with any earnings are permitted. Converting a traditional IRA into a Roth IRA has tax implications. Investors should consult a tax advisor before deciding to do a conversion.