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.