Actions to Consider Before 2020 Ends

What a year it has been – and as if Covid-19 and the election were not enough, there’s been new legislation impacting retirement plans and taxable investment accounts. Despite the legislative changes, you can still increase your savings and possibly lower your 2020 taxes. And there are new ways to avoid penalties and access money from your retirement accounts if you need cash now.

Below are details about the new rules and contribution limits. But please act soon, because most of the below items require action by December 31:

Required Minimum Distributions (RMD) from retirement accounts and IRAs: RMDs are waived in 2020. If you turned 70 on or after July 1, 2019, you do not have to start taking RMDs until you reach age 72.

 

CARES Act distributions: If you or someone in your household has been negatively impacted by Covid-19, you may be able to withdraw up to $100,000 in 2020 from your retirement accounts and IRAs (including SEP-IRAs and SIMPLE IRAs) without paying a 10% penalty to the IRS. To qualify, you must:

• • be diagnosed with Covid-19 using a test approved by the Centers for Disease Control and Prevention;
  • have a spouse or dependent who is diagnosed with Covid-19 using a CDC-approved test; or
  • experience adverse financial consequences as a result of the individual, spouse or member of the individual’s household:
    • being quarantined, furloughed or laid off, or having work hours reduced due to Covid-19;
    • being unable to work due to lack of child care as a result of Covid-19;
    • owning a business that has closed or is operating under reduced hours due to Covid-19;
    • having pay or self-employment income reduced due to Covid-19; or
    • having a job offer rescinded or a start date for a job delayed due to Covid-19; or
  • meet other factors as determined by the Secretary of the Treasury.

If you qualify, any taxes due on the withdrawal can be paid over three years, starting with 2020. You can also file amended tax returns to get refunds from prior-year tax returns if you return any amounts withdrawn to your account within the next three years.

Before exercising any of the above options, be sure to speak with your tax advisor.  Finally, regardless of your age, you can contribute to an IRA for 2020 if you are still working.

Contributions to workplace retirement accounts:

• • 401(k), 403(b), 457 or SAR SEP: You can contribute 100% of your compensation, up to $19,500 ($26,000 if you are age 50+).
  • SIMPLE IRA: You can contribute 100% of your compensation, up to $13,500 ($16,500 if you are age 50+).

If you have not yet contributed the maximum, you can increase your retirement savings (and thus reduce your taxes) by contributing more than usual from your December paychecks. Talk with your HR department.

Contributions to IRAs: The maximum contribution is $6,000 ($7,000 if you are age 50+).

• • You can delay funding your 2020 IRA until next year (no later than April 15). But the sooner you fund the account, the more time your money will be invested!
  • You can contribute this maximum for both yourself and your spouse. Your spouse can do this even if your spouse did not earn any income this year. (Call me for information about creating a spousal IRA.)

Here’s to a better 2021!