Smart Tax Strategies to Consider Before 2020 Ends

October 27th, 2020 by Jim Allen

Our motto here at Anchor Bay Capital is: “It’s not what you make but what you keep that counts.” We live this motto daily and incorporate it into every aspect of our comprehensive financial planning, tax preparation and investment management services. As we near the end of a very eventful year, there are still things you can do to reduce your tax bill before year end.

Tapping into your IRA or 401(k) if you need cash: If you been affected by COVID 19 (subject to certain rules), you can take up to $100,000 from your IRA or retirement plan without the 10% early distribution penalty. While income tax would still be due, you will have the option to spread the income over 3 years or to return the money to the plan within 3 years. Finally, the 401(k) loan provisions have been loosened so that up to $100,000 or 100% of the pan balance can be borrowed with payments delayed for up to one year. These relief provisions only apply for the 2020 tax year. If the COVID pandemic has created financial difficulty for you, these relief provision offer a tax favored way to access cash.

You can skip your 2020 RMD: Normally those over 70 ½ (now age 72) are required to take a minimum distribution from their retirement plan or face a 50% penalty. This requirement has been suspended for 2020, so no one is required to take an RMD this year. This includes those that have an inherited IRA and have to take the funds out over their life expectancy. So if you don’t need or want your 2020 RMD, you can leave it in the account and allow it to grow tax deferred.

Consider Roth conversions for tax diversification: Tax diversification is an important part of any financial plan and the Roth IRA is great way to diversify the tax treatment of your investments. Unlike the traditional IRA where you normally get a tax-deduction for the contribution, Roth IRA contributions are made with after-tax money. But, when qualified distributions are made from a Roth IRA, they are income tax free. Whereas traditional IRAs don’t tax the contribution but do tax the distribution (not taxing the seed but taxing the fruit), Roth IRAs tax the seed but not the fruit. Since nobody truly knows what tax brackets will be in the future, it is smart planning to have some funds in both types of accounts.

A Roth conversion entails taking part of your traditional IRA and converting it to a Roth IRA. This means that you will pay tax on the conversion. However, it also means that if distributions from the Roth are made after 5 years and age 59 ½, they will be income tax free. The strategy with a Roth IRA conversion is to convert just enough so that you stay in the same tax bracket – which requires careful planning and some income tax projections.

Harvest tax losses to offset gains: If there are opportunities to sell items in your taxable accounts with a loss to offset those with a gain, consider if it makes sense in relation to your overall portfolio and your financial goals. While we never want to let “the tax tail – wag the dog”, there are situations where tax loss harvesting is beneficial. The ability to utilize tax loss harvesting is another reason we use individual stocks and exchange traded funds rather than mutual funds, where we would have limited control over the timing of asset sales.

These are just a few of the tax planning opportunities available to you. Whether a strategy will apply to you is highly dependent on your individual financial situation which is why we perform customized tax analysis for all our financial planning clients. If you would like more information on tax planning opportunities, please contact us for a complimentary copy of our Tax Strategies e book. In addition, we will be presenting a tax planning webinar on November 4th and 5th. You can register on our website

Jim Allen, CFP, ChFC, CDFA is the Director of Financial Planning and a Principal at Anchor Bay Capital. In addition to his 30 years of financial planning experience and his professional credentials, he holds a Master’s Degree in Financial Planning and is a former instructor in the CFP program at the University of California Irvine. He is also the co-author of the book “The Tools & Techniques of Charitable Planning.” Jim can be reached at [email protected]