It is that time of year when financial advisors check in with clients to assess items such as rebalancing portfolios, updating insurance beneficiaries and making contributions to 401(k) accounts and 529 plans. But a couple pieces of legislation from the past year
have added some excitement to the usual year-end mix.

As pointed out by Joel Dickson and Maria Bruno during a year-end planning webinar hosted by Vanguard, the SECURE Act from last December and the CARES Act, which went into effect earlier this year, contain planning implications that may maximize tax planning opportunities.

One of the notable changes with the Setting Every Community Up for Retirement Enhancement (SECURE) Act is that starting this year the age for taking one’s first required minimum distribution was pushed back to 72. However, clients who turned 70½ in 2019 were bound by the old rule and had until April this year to take their first RMD, explained Bruno, Vanguard’s head of U.S. wealth planning. But she noted the Coronavirus Aid, Relief and Economic Security (CARES) Act allows individuals to skip the RMD as well as other distributions this year.

Bruno cautioned that advisors who have clients in some type of automated RMD service would need to proactively opt out, otherwise the RMD will be taken.  

Bruno said having the option to skip the RMD creates planning opportunities for advisors to think through with their clients.

“Obviously, taking that distribution results in taxable income, so you want to be cognizant of that,” she said, adding that pairing that income with other strategies—such as a charitable contribution or harvesting investment losses—can offset that income.

Furthermore, Bruno said, charitably inclined investors can take advantage of a qualified charitable distribution. “[QCDs are a] terrific way to satisfy an RMD, or [to] take money out of that IRA without being subjected to internal tax consequences in addition to fulfilling your charitable intent,” she explained.

It all boils down to what your tax picture looks like this year versus down the road. “If you think you might be in a situation where taxes may be higher in the next year or the next several years, and if you are in a relatively lower bracket it may make sense to take that distribution to pay the income tax that’s presumably at a lower rate,” Bruno said.

Dickson, Vanguard’s head of advice methodology, noted that using a QCD from a charitable standpoint offers advantages. For example, if you take a distribution and make a charitable contribution separately that’s doesn’t utilize a QCD, that could result in a higher adjusted gross income that can trigger Social Security taxation or Medicare premium surcharges. So if you make a charitable contribution through a QCD, it will not show up in the income line and you don’t have that impact.

Another CARES Act provision with potential year-end planning implications involves the waiver of the early withdrawal penalty on eligible retirement accounts. This provision allows for families whose spouses or dependents have been adversely affected by the pandemic to take early withdrawals of coronavirus-related distributions up to $100,000 without the 10% penalty that is usually charged to those who have not reached age 59½. The distributions must be made between January 1 and December 31, 2020. Individuals can spread the tax on these distributions over three years, and they have three years to return the money to their accounts.

Dickson pointed out that eligible requests for a coronavirus distribution claim must be made by Dec. 30. 

In addition, he highlighted a big change resulting from the restructuring of the Stretch IRA, a wealth-transfer strategy that extended IRA distributions for non-spouse beneficiaries over their lifetime. The SECURE Act curtailed the Stretch IRA to 10 years, so the funds must be withdrawn 10 years after the original owner’s death.

Dickson said advisors should review beneficiary designations, especially certain trust structures like estate planning, if they were planning to use them to stretch out the IRA. “Those may no longer be relevant under the SECURE Act provision,” he said.

And as advisors meet with clients to assess their portfolios, he offered that they can provide another key service by lending an ear, showing empathy and providing reassurance that a client’s portfolio is on track despite the craziness that has been the year 2020.