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“Cares Act” Investment Planning Opportunities in 2020


Last week we introduced basic financial planning topics presented by the 2020 Families First Coronavirus Response Act, or the “Cares” for short. Cares will impact most Americans to some degree, and today we are focusing on investors. Primary Cares provisions include suspension of Required Minimum Distributions, or RMDs, for the calendar year 2020.

About 80% of Americans with Retirement Accounts withdraw more than their RMD requirement every year for living expenses. This Blog is written especially for the other 20%, but everyone can learn from these concepts and suggestions.

Under the current U.S. Tax Code, taxpayers in the lowest two income tax brackets pay zero tax on Capital Gains and Qualified Dividends. For 2020, that applies to taxpayers reporting Taxable Income under $80,250 (married filing jointly). For these people, the marginal tax rate is only 12%, meaning that every extra dollar they earn (up to that limit) is taxed at a very low 12%.

Many taxpayers exceed the 12% income tax bracket only because of their requirement to take their annual RMDs, which are included in Taxable Income. In 2020, any of these people can simply curtail or limit the amount taken from Retirement Accounts, and some will fall back into the 12% bracket. That is “slam-dunk” short-term Income Planning.

Longer-term financial planning is more complex, and other opportunities exist due to Cares. This is especially true due to recent stock market stress, which has caused many asset values to fall sharply. Beaten-down assets in Traditional IRAs and 401(k)s can be converted directly to Roth Account assets, simply by paying ordinary income tax on the amount converted.

Note that RMD withdrawals cannot be converted to Roth IRA deposits. Also, Roth contributions can only be made from earned income, and are subject to upper income limits. Neither applies to Roth conversions, which are always allowable. Conversions may be in cash or in kind, meaning actual stocks, bonds, mutual fund shares, and ETF shares.

Benefits of carefully planned Roth Conversions are numerous, including:

  • If the assets to be converted are highly depreciated, the (taxable) value of the conversion is only the current market value, regardless of original purchase price. 
  • If the taxpayer is in a low tax bracket, which is especially likely this year in the absence of a 2020 RMD, the effective tax rate is historically low.
  • Future market appreciation and dividends while in the Roth remain forever tax-free.
  • Whatever funds are eventually withdrawn from the Roth Account will not be taxed.
  • No RMDs will be required from the Roth Account (including the conversion amount )during the life of the Account Owner, reducing lifetime tax liability.

 An old saying goes, “Opportunity only knocks once.” While we don’t necessarily agree with the singularity of the event, we think we are hearing noise at the front door.

Van Wie Financial is fee-only.  For a reason.