By Ian Berger, JD
Thanksgiving is behind us, and the end of the year will be here soon. (Many of us are truly thankful for that!) This is a good time to remind you of certain tax breaks that will expire before we turn over the calendar to 2021. Many of these actions require cooperation from third-party IRA custodians and plan administrators, so you need to act fast. As that great philosopher Yogi Berra once said, “It gets late early out there.”
Take Advantage of CRDs. The clock is ticking for those of you who are “qualified individuals” under the CARES Act to withdraw up to $100,000 of CRDs (coronavirus-related distributions) from IRAs and/or company plans. CRDs are not subject to the 10% early distribution penalty, CRD taxable income can be spread over 2020, 2021 and 2022, and CRDs can be repaid within three years.
However, CRDs are usually taxable and, unless paid back, reduce your retirement nest egg. So, they should be taken only as a last resort. Any CRD must be received by December 30 (not December 31) 2020.
Do a Qualified Charitable Distribution. Don’t forget about QCDs (qualified charitable distributions). Despite recent tax changes, QCDs remain a great tax break. If you own an IRA and are at least age 70½, you can transfer up to $100,000 tax-free directly from your IRA to an eligible charity. QCDs are often used to offset RMDs, but QCDs are still available this year even though RMDs are waived for 2020. Just make sure the QCD is received (or a checkbook IRA check is cashed) by the charity by year-end.
Consider Roth Conversions. If you’ve been considering a conversion of your traditional IRA or pre-tax 401(k) funds to a Roth IRA, 2020 may be the perfect year to pull the trigger. Although Roth conversions generate immediate taxation, federal tax rates are historically low – and may not stay that way for long. Also, your other 2020 taxable income may be lower than usual because of virus-related work reductions. Although RMDs are waived this year, you can still request payment of your RMD amount (or even a larger amount) and convert it to a Roth IRA. (RMDs in a normal year cannot be converted.) All Roth IRA conversions must be done by December 31 to qualify for 2020.
Use the NUA Strategy. December 31 is a crucial deadline if you’re using the NUA (net unrealized appreciation) strategy this year. NUA allows you to pay ordinary income tax on the cost basis of company stock– not the total value of the stock– when you withdraw it. The difference between the two (the NUA) isn’t taxable until the stock is sold – and it is taxed at favorable long-term capital gains rates. However, with a few limited exceptions, your entire account must be emptied within one calendar year. So, if you’re using the NUA rule this year, be sure to clean out your 401(k) account by December 31.