2. IRA Distributions
In 2020, you aren’t even required to take money from your IRA distributions. The Coronavirus Aid, Relief, and Economic Security Act waived required minimum distributions for the year. But advisors should tell clients to look at taking voluntary IRA distributions anyway, even if they aren’t required. That’s because clients taking money out of these tax-deferred vehicles in 2020 might be able to do so at lower tax rates.

Since the required minimum distributions are waived for 2020, this presents a onetime opportunity for those subject to the minimums to convert RMDs instead to Roth IRAs (something they can’t normally do). Once the required distributions begin, they must be withdrawn as the first dollars out and cannot be converted. This makes Roth conversions more expensive tax-wise since the tax on RMDs must first be paid to convert any part of the remaining IRA or plan funds. But this is not the case for 2020, so this year presents a now closing window of opportunity to get this done.

Even if clients are not subject to required minimum distributions, it may pay for them to begin taking taxable distributions to get them into the lower tax brackets and begin reducing the future IRA debt that’s building for Uncle Sam. The funds could be used either to convert to Roth IRAs (as we discussed earlier) or for gifting or estate planning (which we will cover later).

For example, the IRA funds withdrawn can be used to purchase permanent cash value life insurance, which after the SECURE Act will prove to be a better estate planning vehicle than inherited IRAs. Like Roth IRAs, life insurance will grow tax free and the eventual proceeds to beneficiaries will be tax free as well. That’s a good use of IRA funds now. IRA or plan withdrawals taken this year can also be used for gifting to family members.

The point is that even though minimum distributions may not be required this year, the writing on the wall tells us we must start whittling down taxable IRA balances before the tax debt, like our national debt, balloons out of control. A tax debt in retirement can hamper a client’s spending power when they need it most—when the paychecks stop.

3. Qualified Charitable Distributions for 2020
Qualified charitable distributions are the most tax-efficient way to make charitable gifts because they reduce taxable IRA balances at no tax cost. The name refers to a direct transfer of IRA funds to a qualifying charity.

The only downside here is that the QCD is not available to more people—only IRA owners and beneficiaries age 70½ or older qualify. The distribution is not available from company plans and not permitted to go to donor-advised funds or private foundations. So advisors must focus on those clients who will qualify in 2020.

Qualified charitable distributions are limited to $100,000 per year for each IRA owner, not per IRA account. That limit is large enough to work for most clients.

Although the SECURE Act raised the required minimum distribution age to 72, the QCD age remains at 70½. This gap means the charitable distributions can begin before RMDs kick in.

Some clients are not doing the charitable distributions for the year because RMDs were waived for 2020. But clients can still make these QCDs nonetheless. Even if there are no required minimum distributions to offset, the charitable distribution still allows clients to remove IRA funds at a zero tax cost. If the clients are giving to charity anyway, and they qualify for QCDs, then this is the way they should be doing their giving.

Most people no longer itemize deductions since they generally take the larger standard deduction, which is even larger for those age 65 and over (or blind) who receive an extra standard deduction amount. This makes it even more likely that those subject to required minimum distributions who qualify for qualified charitable distributions at age 70½ or older will not itemize and will receive no tax benefit for their charitable donations.

With qualified charitable distributions, however, you receive both the standard deduction and the tax benefit in the form of an exclusion from income. An exclusion is better than a tax deduction because it reduces your adjusted gross income, a key figure on the tax return. AGI determines the availability of tax deductions, tax credits and other benefits that will be allowable. It also determines the level of taxation of Social Security benefits and surcharges for Medicare Parts B and D income-related monthly adjustments, for example.