Op-ed: Retirees should take these monetary steps earlier than December 31st

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Back in March, a couple who had recently sold their business called me to express concerns about their decision to sell and retire. As Covid-19 raged, the stock market quickly lost value and retirement savings declined. They asked a simple question: did they have to worry, or worse, consider going back to work?

To address their concerns, we conducted a financial “stress test”.

It’s a simulation of scenarios to assess whether your financial plan and investments could withstand the chaos in the stock markets. Even though their investments were down more than 10%, the test ensured that their portfolio was well positioned to withstand further volatility. With this information, the couple quickly dropped any thought of returning to work.

While the effects of the coronavirus pandemic baffled us all, it also served as a necessary wake-up call. For those close to retirement, the opportunity to reassess their financial schedule is vital. Additionally, new laws may be passed this year to help Americans endure Covid-19. This can have beneficial consequences for certain investors’ tax returns for 2020 and their investments.

In the remaining weeks of 2020, there are three recommendations to consider.

Take the time to test your game plan for retirement. With baby Boomers who are retiring for a variety of reasons, including early retirement due to layoffs, now is a good time to consider your financial and retirement plan.

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Like the couple mentioned above, this assessment will help investors better understand how their portfolio and financial plan will respond to economic disruptions. These tests simulate a wide variety of financial outcomes.

And if there is a problem, this analysis provides an opportunity to identify and address the problems early on. A common example is that retirement costs start higher than planned. Many investors mistakenly assume that their lifestyle will slow down after retirement, but that’s where the fun often begins.

By running a recurring stress test, any initial overspend can be analyzed and resolved before the problem connections occur. And for most investors, the stress test produces results that are much better than the worst-case scenarios they envisioned, and that will bring peace and serenity during a critical transition period.

It is important to note that in 2020 retirees may avoid paying some taxes. Due to changes in the rules for distributions from 401 (k) plans and other qualifying retirement accounts, retirees have a one-time opportunity to avoid certain 2020 income taxes.

The reason is largely related to the amount a retiree must withdraw from these accounts annually, which is often referred to as the minimum payout required. Here is the background:

In late 2019, Congress passed the SECURE Act, which postponed the starting point for RMDs to the year a person turns 72 instead of 70½.

In March 2020, the CARES Act was passed, which waived RMDs for all types of retirement benefit plans – including the inherited individual retirement benefit accounts for the 2020 calendar year.

For investors who need to make these withdrawals, these two changes can become a timely benefit. Instead of withdrawing money as RMD when normal income taxes are incurred, many retirees can reduce their income by tens of thousands of dollars by withdrawing money from their non-retirement accounts instead.

For an investor receiving an annual payout of $ 100,000 from their IRA in the 22% federal tax bracket, income taxes could be cut by as much as $ 22,000 in 2020.

Even if an investor has to pay capital gains to raise the funds to pay off, a tax tip is that capital gains rates are always lower than the normal income tax rate. So, from a tax point of view, it is generally better to make distributions from non-annuity accounts when possible.

As a result, many investors could have minimal to negative taxable income in 2020 due to the suspension of RMDs. If so, there is a clear opportunity to convert taxable IRAs at below average tax rates into a Roth IRA.

The final weeks of 2020 are also a very good time to see if it makes sense to convert any of your traditional IRA funds into a Roth IRA. Anyone can benefit from this strategy, whether or not the withdrawals required laws apply.

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I’m working with a couple in their early 60s who retired in mid-2019 to convert roughly $ 75,000 to $ 100,000 from their IRAs into a Roth. They have postponed social security benefits and are currently living on their personal investments and money. Since their modest income, applied against their standard deduction, results in almost no taxable income that year, a conversion should work for them.

My goal was to manage the conversion threshold in such a way that their ordinary income is below the income tax bracket of 12% for the married couples submitted together. Regardless of the amount converted, the long-term benefits are substantial. After converting the $ 75,000 to $ 100,000 into Roth IRAs, these funds will no longer be subject to RMDs and will grow tax free.

As we approach a potentially difficult winter, use this time wisely to look ahead and be prepared. With these steps retirees can look forward to a successful year 2021.

– By Brett Miller, partner and investment advisor at Brightworth

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