Harvest Portfolio Management



Timing is Everything! As of 2020, the age for withdrawing from retirement accounts changed. It now must happen by April 1 following the year account holders reach age 72 (prior to 2020, the RMD age had been 70? years old). The retiree must then withdraw the RMD amount?each subsequent year based on the current RMD?calculation.However, on March 27, 2020, President Trump signed?a $2 trillion coronavirus emergency stimulus package?into law. It suspended required minimum distributions from retirement accounts in 2020. This gives those accounts more time to recover from the stock market downturns, and retirees who can afford to leave them alone get the tax break of not being taxed on mandatory withdrawals.KEY TAKEAWAYSThe required minimum distribution is the amount you must take out of your account to avoid tax consequences.Retirees can and do take more than the RMD.If you have multiple accounts, you will usually need to calculate the RMD for each separately and may have to take an RMD from each.The $2 trillion coronavirus emergency stimulus package suspended required minimum distributions from retirement accounts in 2020.Understanding Required Minimum Distribution (RMD)An RMD acts as a safeguard against people using a retirement account to avoid paying taxes. Required minimum distributions are determined by dividing the retirement account’s prior year-end fair market value by the applicable distribution period or life expectancy. The Internal Revenue Service (IRS) has a worksheet to help taxpayers calculate the amount they must withdraw.1?Some qualified plans allow certain participants to defer the start of their RMDs until they actually retire, even if they are older than age 72. Qualified plan participants should check with their employers to determine whether they are eligible for this deferral.?Roth IRAs?do not require withdrawals at any age, as the taxes are already paid.A Roth IRA conversion is a transfer of retirement assets from a Traditional,?SEP, or?SIMPLE IRA?into a?Roth IRA, which creates a taxable event. A Roth IRA conversion can be advantageous for individuals with large traditional IRA accounts who expect their future tax bills to stay at the same level or grow at the time they plan to start withdrawing from their tax-advantaged account, as a Roth IRA allows for tax-free withdrawals of?qualified distributions.KEY TAKEAWAYSA Roth IRA conversion involves transferring retirement funds from a traditional IRA or 401(k) into a Roth account.Since the former is tax-deferred while a Roth is tax-exempt, the deferred income taxes due must be paid on the converted funds at that time. There is no early withdrawal penalty.This strategy makes sense if a saver believes that the deferred tax liability in the traditional account will grow as retirement approaches, where it is better to pay those taxes now than later. The growth in tax liability can be due to an increase in income, an increase in the market value of the retirement account or change in tax law. A sever market correction is an ideal time to convert to a Roth.How a Roth IRA Conversion Works:A conversion may be accomplished by a?rollover?of assets directly between the trustees of the traditional and Roth IRAs, or by the IRA owner distributing the assets from the traditional, SEP, or SIMPLE IRA and rolling over the amount to the Roth IRA within 60 days of receiving the distributed amount.Any such conversions?should be done with due diligence, possibly consulting a?financial planner?or personal tax professional, as there may be major tax implications if not done appropriately. This is even more important because?a Roth conversion completed after December 31, 2017, can no longer be?recharacterized—in other words, it can't be reverted back to a traditional IRA later.When Conversions Make Sense:The big advantage of Roth IRA conversions?is having tax-free?withdrawals?in retirement. This can be appealing?if you expect to be in a higher marginal tax bracket in retirement, which is typically not the case for most people. But there's another aspect to conversions that gets less attention. By timing a series of?conversions?to coincide with years when your tax bracket is lower, the amount of taxes paid for those conversions would be minimized.Tax considerations are the key to a Roth IRA conversion. It makes little sense to convert if you'll be handed a tax bill now that will be much larger than if you had waited to withdraw the funds. In addition, the?time value of money?is important. A dollar in your hand today is worth more than a dollar coming at some time in the future. Another factor is that you don't want a large conversion in any one year to bump you into a higher tax bracket.Another aspect to consider is making a?charitable deduction?with the assets from an IRA. The 2018 changes in the tax law have in effect taken these deductions off the table for many taxpayers. But if you were to use money from an IRA to make a charitable contribution, the tax deduction for a contribution to a public charity can be up to 60% of a couple's?adjusted gross income?(AGI) for cash donations, and up to 30% for donations of securities such as those in an IRA. If your contribution exceeds these limits, the IRS??????? allows you to carry the excess forward for up to five years.?Example of a Roth Conversion:For example, if a married couple who expect to?file jointly?with $200,000 in taxable income convert up to $126,600 to a Roth IRA they could stay within the?32% marginal tax bracket for 2020, which applies to taxable income between $171,050 to $326,600. A dollar above that limit would kick the couple into the 35% bracket.I hope you find this helpful and please stay well,Mark J. Seski Master of Science in Taxation Harvest Portfolio Management ................
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