Brett S. Miller, CPA, CFP® | Partner | Wealth Advisor
This article is the second part of a two part series. See Part 1
Welcome back to the second installment of our COVID-19 Six-Month Review. We will pick up right where we left off, with three additional planning opportunities to take into consideration heading into year-end.
Required Minimum Distributions Not Required for 2020
The last 12 months have seen two significant changes to the rules surrounding Required Minimum Distributions (RMDs) from qualified retirement assets. In late 2019, Congress passed the SECURE ACT thereby deferring the starting point of RMDs from the year an individual turns 70 ½ to the year they turn 72. Then, in March of 2020, Congress passed the CARES ACT effectively nullifying the requirement to take an RMD for 2020. We find that many investors wait until later in the tax year to take their RMDs, so this is a signal to pause for those who are contemplating their RMDs heading into year end.
While this deferment of action was initially greeted with a sign of relief, we encourage you not to miss the opportunity created by this unique circumstance. Many investors who qualify for RMDs are already in full retirement. Aside from the taxable income “forcibly” generated by RMDs, many have the benefit of proactively managing their remaining taxable income by selectively drawing from non retirement assets to meet their needs. As a result, investors could find themselves in a year where they have minimal to negative taxable income due to the suspension of RMDs. We encourage you not to let this opportunity go to waste! With an election upcoming and the legitimate prospect of higher taxes in the coming years, this window represents an opportunity to execute taxable IRA to Roth Conversions at below average tax rates.
IRA to Roth IRA Conversion Planning
The good news about IRA to Roth Conversion planning is that you do not have to qualify for RMDs to take advantage of this strategy. I recently spoke with a couple who is in a prime position. They both retired in mid-2019 and are in their early 60s. They have deferred taking social security and are currently living off their personal investments and cash, generating modest interest and capital gains. When this income is applied against their standard deduction, their taxable income is effectively nil for the year. We are in the process of converting approximately $75,000 to $100,000 of their IRAs to Roth IRAs to lock in today’s lower income tax rates. We are working with their CPA to run a tax projection to ensure we stay below the top of the 12% Married Filing Jointly income tax bracket. When executed, the funds transitioned to their Roth IRAs will be free of future Required Minimum Distributions and will grow income tax-free, thus creating a great win-win!
Comprehensive Brightview Wealth Plan Analysis
While the market recovery from early March has helped to restore investment asset levels, the emotional damage inflicted continues to heal. Baby Boomers are retiring at an accelerated pace and many are using the Covid “earthquake” as a wake-up call to examine the security of their financial “foundation”. For many, the displacement of Covid has create a reflection on lifestyles, priorities and values, to the point that many are contemplating the new normal that lies ahead.
Since mid-2018, McGill Advisors has been on a journey to implement Brightview, our Wealth Planning and Retirement Projection deliverable. We have been intentional to roll this out deliberately, helping to build out each client’s Wealth Plan as the opportunity aligned. As we move forward, we have a goal to integrate all clients into Brightview by the end of 2021. We seek to leverage this resource as a comprehensive and ongoing Wealth Planning tool. For those struggling with the emotional impact of Covid, Brightview enhances our ability to quickly assess your goals and project forward with stress tests, the probability of future assumptions such as savings, retirement dates, withdrawals, and market fluctuations. Similar to an ongoing health physical, it is important to regularly assess and check the status of your overall Wealth Plan. In practice, this exercise leads to greater piece of mind, especially during periods of market volatility, as well as the ability to identify and mitigate issues when they are smaller and easier to address.
Similar to the Spanish Flu of 1918, it will be interesting to look back in time at Covid-19 and realize it’s true impact on the future. Tragedies will be mourned, lessons will be learned, and opportunities will be identified. As the figurative “tsunami” approaches, we encourage you to take this time to look forward and be prepared. We remain optimistic about the future and stand ready to serve our clients and their families in the years ahead.
The information provided is for informational purposes only and should not be construed as investment or legal opinion. Please consult a tax or financial advisor with questions about your specific situation