To us, financial planning is not an event. It is an exercise that helps capture a consolidated, global review of your financial situation leading to the creation of a living document.
By Andy Drennen, CFP®, MPAS®
We closed the book on 2019 in unprecedented fashion and enter 2020 shrouded in uncertainty. Some of the confidence-shaking hangovers carrying into 2020 include: President Trump’s impeachment by the House, unresolved trade negotiations, slowing global economic growth, the potential change of the political landscape, legislative changes, geopolitical uncertainties, new all-time highs in the stock market, and a record setting length of economic expansion.
In 2020, do not let your political biases take over your investment decisions. Research has shown that the stock market does not favor one political party over another.1 Therefore, focus on what you can control. Focus on your long-term goals, the quality of stocks and bonds in your portfolio, asset allocation, long-term risk tolerance, and income tax strategies. Coordinating these elements can help you achieve success in the years ahead.
Barring congressional action, income tax rates are scheduled to go back up to higher pre-tax reform rates in 2026. Here are some actionable ideas to coordinate your investment decisions with income tax strategies on your road to retirement.
The SECURE Act
Without question, this is a game changer for all Americans planning for retirement. After passing in the House twice with overwhelming bipartisan support in 2019, the new sweeping legislation was attached to the 2020 spending bill. The SECURE Act passed on Thursday, December 19th by the Senate and signed into law on December 20th.
Among a multitude of other things, this bill pushes back the age for required minimum IRA distributions to age 72 from 70½. It could allow small businesses and their employees easier access to participate in 401(k) plans and it requires inherited IRAs to be paid out to beneficiaries within 10 years (limited exceptions apply, such as a spousal rollover). 2
The current low tax rates, likelihood of future tax increases, and required 10-year payout of inherited IRAs by the SECURE Act make the tax-free growth, tax-free distribution, and no required minimum distribution features of Roth IRAs very attractive. You must own the Roth for at least 5 years and be age 59½ or older to enjoy tax-free withdrawals.
Individuals ineligible for direct Roth IRA contributions could consider a “back door” Roth contribution or funding with their employer retirement plan, if available. A back door contribution is where a taxpayer makes a non-deductible traditional IRA contribution and subsequently converts the IRA to a Roth IRA. Consult with your tax professional to be sure you follow the very specific rules.
Similarly, individuals could simply convert all or a portion of their Traditional IRA to a Roth IRA with no adjusted gross income restrictions. The amount converted would be taxable as ordinary income at these lower post-tax reform rates. Although, once a conversion is processed it cannot be undone.
With new all-time highs in the stock market and looming uncertainties, the stock market could experience heightened volatility moving forward. The tax-free benefits of a Roth IRA could be amplified in the recovery if funded during a market correction.
Qualified Charitable Distribution
The SECURE Act will continue to allow qualified charitable distributions (QCD) at age 70 ½ instead of linking it with the new age for required minimum distributions, age 72. A QCD allows taxpayers to make distributions direct from an IRA to a qualified charity and not have the amount of the donation includable in taxable income. Furthermore, the amount donated to the charity will count toward the required minimum distribution for that year. The donation is not taxable up to $100,000 per year per taxpayer.
Gift Appreciated Securities
With the remarkable market performance of 2019, consider gifting appreciated securities to charities or individuals. Gifting appreciated investments can help reduce concentrated positions, avoid realizing capital gains at your potentially higher tax rates, reduce the size of your estate to avoid estate tax (if applicable), and the recipients get to benefit from your wise investment decision. For 2019 and 2020 the annual gift exclusion amount is $15,000. As long as the market value of the appreciated securities along with all other gifts to a single person during the year is $15,000 or less, you will not likely need to file a gift tax return and your lifetime estate tax credit would not be reduced.
Sell Appreciated Securities
Two thirds of taxpayers received a tax deduction under the Tax Cuts and Jobs Act of 2017 (TCJA).3 This is due to larger standard deductions and having more income taxed in lower brackets.
With long-term capital gains rates taxed at 0%, 15% or 20% based on taxable income, perhaps you could consider realizing long-term gains ahead of the scheduled tax rates changes in 2026. Realizing capital gains also resets your cost basis, and accumulated gains can be a tax time bomb for future distributions. Resetting your cost basis to higher levels can also help with tax loss harvesting to potentially reduce taxes in future years with lackluster market performance.
Consult with your Central Trust Company relationship manager or portfolio manager to see how the themes of 2019 may have impacted the financial plans you’ve made for the years ahead.
- Reuters. (2019, June 26). There’s No Preferred Political Party for Stocks. Retrieved from Reuters.com: https://www.reuters.com/article/idUSWAOA2EM09A74196D
- 116th Congress. (2019). Setting Every Community Up for Retirement Enhancement Act of 2019. H.R. 1994 -. Washington, DC: Congress.Gov.
- Journal of Financial Planning. (November, 2019). TCJA Has Mixed Impact on Clients. Journal of Financial Planning, 16.