Allworth Co-CEO Scott Hanson outlines a few money-saving, year-end tax moves, and he also shares an important reminder for anyone opting not to take a 2020 Required Minimum Distribution.
While it’s not over yet, with vaccines heading into production, the end of COVID-19, and all its restrictions, seems to finally be in sight.
So, before I get to those year-end tax tips that are specific to 2020, I want to offer up a little encouragement by addressing any unhealthy habits you may have adopted during the pandemic.
Case in point: 72% of people say they’ve gained weight during COVID-19, and 25% of us say we are drinking more.1
With all we’ve been through, I’m not saying that right now is the time for a crash diet.
But consider that, even if you’ve never been someone who exercised much, before the pandemic, our lives had built-in breaks (commutes, lunch, socializing) and physical activity (walking to the subway, the parking lot, or around the office), that we don’t have now. Plus, for those who have yet to retire, the home office itself adds stress (one study reported that we are working 40% more than before the pandemic1), which tends to send us in search of the comforts of over-consumption.
If you’ve gained weight, or if you’re drinking to excess, don’t be too hard on yourself. This is just a reminder to take breaks and move around more. If you’re like most people, and you’re engaging in fewer healthy habits than a year ago, consider rewarding yourself by taking a couple of walks a day, and by cutting back a little on the alcohol and food intake.
Think of it this way: If you begin now, once COVID-19 is defeated, and everything opens back up, you can hit the ground running.
Now, on to taxes.
COVID-19 isn’t only impacting our emotional and physical health. It’s also led to the temporary alteration of several laws concerned with Required Minimum Distributions (RMDs) and taxes.
It’s a one-of-a-kind year, so you may need to get on top of it now.
Since RMDs are not required this year due to COVID-19, most IRA account holders are letting that money stay put and grow. But no RMDs means no taxes have been withheld, which means you might have to come up with the money to pay taxes on things like Social Security and dividends that you have typically covered with money you’ve withdrawn from your IRA.
With the end of the year just six weeks away, here are some options.
First, don’t wait. Speak with your accountant now.
Second, if you owe taxes, even though the law was changed for 2020 (and you aren’t required to take one), you could go ahead and take that distribution from your IRA to cover the liability. (Of course, that makes the distribution taxable, too.) That means you’ll need to “gross up” the distribution to account for the additional tax.
Another option would be to make a fourth quarter estimated tax payment. While this might subject you to an “underestimated tax penalty” because the IRS expects to get paid evenly throughout the year, the penalty would probably be less than the additional tax you’d have to pay if you were to take the money from your IRA as a distribution.
In an ordinary year, taxes are complex and mistakes costly. In 2020, they are exponentially more confusing than usual.
Whether you’re retired and taking RMDs, or still working, speak with your tax professional as soon as possible to make sure you don’t get taken by surprise by any of the temporary changes brought about by the pandemic.
And now, some more end-of-year tax tips for savvy investors:
If you’re looking to lower your taxable income, one of the easiest ways is by saving as much as possible in your traditional 401(k). Anyone age 50 and older can contribute up to $26,000 in 2020.
Take note of how much you’ve contributed so far this year. Will you reach the max – or whatever goal you have – by the end of next month? If you won’t, massage your budget so you can siphon extra cash toward retirement.
Also, just keep in mind that you likely only have a few pay periods left before the end of the year, so if you want to adjust your contribution levels, do it now.
While millions of people have been unemployed for most or parts of 2020, if you’re expecting a year-end bonus, or you are a freelancer or contractor who bills clients, look at this year’s total income and, if possible, estimate what you think your income will be next year.
If, for any reason, you think you’ll earn less next year, shifting any year-end income from this year into 2021, or waiting a few weeks to invoice clients, could lower this year’s taxable income.
On the other hand, the opposite holds true, as well. If you expect to earn more money in 2021, consider doing everything you can to accelerate income into this year.
When it comes to our federal tax rates, while no one can predict what will happen in the next few years, the fact is that they are currently historically low. This means now might be a good time to execute a "Roth conversion."
A Roth conversion turns pre-tax money sitting in a traditional IRA into after-tax money that sits in a Roth IRA. While you’ll pay taxes on however much you’d like to convert, the benefits can outweigh that initial tax hit.
Speak to your advisor and your accountant before embarking on this strategy, but if you have a large retirement account balance, now might be a great time to convert that money to a Roth.
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1The NBRI Circle of Excellence Award is bestowed upon NBRI clients meeting one or both of the following criteria: Total Company score at or above the 75th percentile of the NBRI ClearPath Benchmarking Database and/or improvement of five (5) or more benchmarking percentiles in Total Company score over the previous survey.
2Scott Hanson (2011, 2012, 2013, 2014, 2015 & 2016) and Pat McClain (2012, 2013, 2014, 2015 & 2016). Barron's© magazine is a trademark of Dow Jones L.P. The ranking reflects the volume of assets overseen by the advisors and their teams, revenues generated for the firms and the quality of the advisors' practices.
3As of 12/20, Allworth Financial, an SEC registered investment adviser and AW Securities, a registered broker/dealer have approximately $10 billion in total assets under management and administration.
4Barron’s 2020 Top 100 RIA Firms. Barron's© magazine is a trademark of Dow Jones L.P. The ranking reflects the volume of assets overseen by the advisors and their teams, revenues generated for the firms and the quality of the advisors' practices.
✢Scott Hanson, Investment Advisor 2005, 25 most influential people in the financial services industry. The ranking reflects 25 people who Investment Advisor magazine believes have had or will have the greatest influence on the financial services industry.
✼Pat McClain, InvestmentNews 2014, Invest in Others Community Service Award, presented to an advisor who has made an outstanding impact on a community through managerial contributions to a non-profit organization.
†Financial Times, FT 300 Top Registered Investment Advisers, June 2019. The ranking reflects six areas of consideration including the company's years in existence, industry certifications of key employees, AUM, asset growth, SEC compliance record and online accessibility and calculates a numeric score for each company.
Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.