Don’t leave money on the table at year-end

Skylar Riddle, CFP® in Retirement Planning 17 December, 2020

At the beginning of the year, the SECURE Act gave retirees the ability to delay taking their Required Minimum Distributions (RMDs) until the age of 72. A few months later, the CARES Act provided many Americans with relief throughout the COVID-19 pandemic. But with the year quickly coming to a close, there are actions some investors need to take by December 31 to ensure they aren’t leaving any money on the table.

CARES Act

Signed into law on March 27, 2020, the CARES Act was designed to help retirement savers and retirees ease coronavirus-related hardships and enhance the durability of savings. But now that we’re only a few short weeks away from the new year, there are moves investors should take in regards to this act.

Since retirees weren’t required to take their RMD from their retirement accounts this year, investors who have been taking their RMDs or were supposed to start this year can put that on hold. And if they already took money out of their accounts this year, they’re able to put all or some of it back. That’s a huge savings opportunity. For someone who has a $500,000 retirement account that had to take $20,000 out this year, they would save about $4,000 on taxes. So for someone who doesn’t need that money and only takes it out because they’re required to, that’s an excellent opportunity for them to save. But if an investor needs that money, they should talk with their advisor because it may make sense for them to take the money from another account to take advantage of those tax savings.

For investors who were supposed to start taking out RMDs this year, they can view 2020 as a practice run. In a normal calendar year, an investor would receive a 50% tax penalty if they didn’t take their RMD out by the end of the year.

Although financial advisors don’t have a crystal ball to show what may happen in the future, it’s quite possible that some portions of the CARES Act may be carried over into 2021. There may be some tweaks made, but there could be a similar act passed to promote the economy and help retirees who may need financial assistance.

The CARES Act has also helped individuals who have fallen on tough times if they or their family has been impacted by COVID-19 (contraction of the disease, financial hardship, or unemployment). These individuals are allowed to take a distribution of up to $100,0000 without paying the 10% penalty as long as their employer didn’t opt-out of the CARES Act provision. They’ll still have to pay normal income taxes on these funds, but it’s spread out over three years, and they can put that money back into their account as long as they file an amended return.

SECURE Act

Although some investors have put the SECURE Act to the side in favor of the CARES Act, there’s one thing in particular that investors should keep top of mind as 2020 comes to a close.

Similar to the CARES Act, the SECURE Act allows retirees to delay RMDs. Although it has less of an impact this year, for individuals who have turned 70.5 years old after January 1, 2020, they can now wait until they turn 72 to take out RMDs. This essentially means that they have an extra year to take advantage of tax growth. For people who are still working and have earned income, they can contribute to a retirement account. If they’ve earned income at any point in the year, they may be able to put those funds in a tax-deferred account.

Regardless of any changes an investor may have made this year as a result of the CARES Act or SECURE Act, always contact your financial advisor to make sure you’re not leaving any money on the table and so they can answer any questions you may have.

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