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By Theresa Fry, Senior Vice President and Manager, IRA’s and Retirement Planning

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Unlike years past when you may have been dreading that there are a mere seven weeks remaining in the year, you may be happy to see this one end. The year 2020 has been a year like none other. It has been a leap year, an election year, and of course, the year when the COVID-19 pandemic changed the way we work, shop, travel, and live. This year has certainly presented some challenges. But it’s not over yet, and there are still opportunities for you to take some important financial steps before the year is gone.

Between now and December 31, we will be sharing with you our list of “Financial To-Dos” – reminders of strategies you may want to consider before the year is over. Our first in this series addresses the suspension of required minimum distributions (RMDs) in 2020 (what’s out) and how that creates some unique planning opportunities for conversions and charitable IRA distributions (what’s in).

Am I required to take an RMD in 2020?
No! All RMDs in 2020 are temporarily suspended. The Coronavirus Aid, Relief and Economic Security Act (CARES Act) removed the requirement earlier this year for all IRAs, 401(k)s, 403(b)s, and other employer-sponsored retirement plans, including those you may have inherited from a loved one.

Next year, in 2021, we expect RMDs to start up again and be back to business as usual. There is no requirement to “make up” or “double up” the amount you will have to take next year.

Does that mean I can convert to a Roth IRA if I am over age 70½?
Conversions have always been available at any age. The difference this year is there is no need to take your RMD first before you convert because all RMDs have been suspended. This can present an opportunity for those who can afford to do a conversion this year. Any conversion from a traditional IRA to a Roth completed by December 31 will increase your taxable income on your 2020 income tax return. You decide when and how much to convert. In addition, you don’t have to liquidate your investments when completing a conversion. Keep in mind a conversion is a one-way street and cannot be reversed, so make sure you review this strategy with your tax professional before you decide to take action.

I usually direct my RMD to charity; can I still do that if I don’t have an RMD this year?
Yes! IRA distributions, including RMDs are typically included in your taxable income. However, if your IRA distribution meets the requirements to be a qualified charitable distribution (QCD), then the distribution is tax free. A QCD is a direct gift out of your IRA to a qualified charity of amounts up to $100,000 a year. It is not limited to the amount of your RMD for the year. It will not increase your taxable income and therefore does not increase your adjusted gross income and can be a tax-efficient strategy even if you do not itemize. A QCD can only be made from traditional IRAs (not 401(k) or other employer-sponsored retirement plans, including SEP and SIMPLE IRAs) and you must be age 70½ (6 months past your 70th birthday) at the time you make the gift. Check with your tax advisor or the charity before you take the distribution from the IRA to make sure it qualifies.

 

If I want to do a QCD, how much can I gift to the charity from my IRA?
You can gift up to $100,000 by December 31 as a tax-free QCD from your IRA.

If I inherited an IRA, can I do a QCD?
That depends. In order to qualify as a QCD you must be at least age 70½ at the time the gift is made. If you are, then you can treat an inherited IRA distribution as a QCD. If not, you could take a distribution and then gift it to a charity. This may qualify you for a charitable income tax deduction. Discuss this strategy with your tax professional to see how the charitable contribution will impact your taxes.

Additional year-end financial to-dos will be coming to you over the next seven weeks. The clock is ticking so make sure you talk to your financial advisor soon if you would like more information about our year-end planning strategies.

November 12, 2020 |