Year-End Planning: 2021 Changes and Your End of Year Checklist
By Saghir A. Aslam
Rawalpindi, Pakistan
(The following information is provided solely to educate the Muslim community about investing and financial planning. It is hoped that the Ummah will benefit from this effort through greater financial empowerment, enabling the community to live in security and dignity and fulfill their religious and moral obligations towards charitable activities.)
Among its countless impacts, the corona virus pandemic led to the passage of the corona virus Aid, Relief and Economic Security (CARES) Act, which brought investors a number of changes to deal with during this year. In addition, investors are seeing changes in 2021 that were created by the Setting Every Community Up for Retirement (SECURE) Act, which was signed late in 2019. Because of these acts, investors have new issues to consider for the remainder, including:
CARES Act
- Retirement Plan Distributions
What changed: Required minimum distributions (RMDs) are waived for 2021 from certain qualified retirement plans (QRPs) such as 401 (k) and 403(b) plans; IRAs including inherited IRAs; and 2019 RMDs not taken in 2019 with a required beginning date of April 1, 2021.
Next Steps: Although you’re not required to take an RMD in 2020. You want to take it anyway.
- If you believe you are in a lower tax bracket now than you expect to be in the future, a current distribution may result in long-term tax savings.
- Distributions you take now will reduce your year-end which could decrease the amount you have to distribute in future RMDs.
- If you do not need the cash flow, consider converting the distribution to a Roth IRA to take advantage of the possibility for tax-free growth.
Consider the amount of income you expect over the next 5-10 years. Are there times when it might be lower or higher? It may be beneficial to take retirement plan distributions in these lower income, lower tax bracket years to capture some tax savings.
Charitable Contributions
What changed: if you’re unable to itemize deductions, you will be allowed a charitable deduction of up to $300 for this year (2020). If you can itemize, the adjusted gross income (AGI) limitation is waived, letting your offset more of your taxable income. These provisions apply only to cash contributions and not to contributions to donor advised funds or other organizations.
Next Steps: if you’re charitable inclined and itemize your deductions, you may want to increase your cash gifts to offset Roth IRA conversion income or significant capital gains from the sale of the concentrated position (a large holding in a single investment or real estate.
- Coronavirus-related Distributions (CRD) FROM Retirement Accounts
What’s new: qualified individuals of any age can take up to $100,000 from IRAs and QRP. These distributions are exempt from the 10% additional tax of early and or pre-59½ distributions and not subject to the 20 % withholding requirements for qualified retirement plans.
A qualified individual is someone who is diagnosed with the virus SARS-COV-2 or coronavirus disease (COVID-19) by a test approved by the Centers for Disease Control and Prevention or the experience of adverse financial consequence due to one or more of the following factors: being guarantied, furloughed, laid off, having work hours reduced, unable to work due to SARS-COV-2 or COVID-19, closing or reduced hours of business owned or operated by the individual due to COVID-19, or other factors as determined by the Treasury Secretary. Keep in mind these distributions will be taxable evenly over three years beginning with this year and if you want, you may repay the distributions within three years.
Next Steps : ifyou’re eligible and considering taking distributions, consult your financial advisor about the potential impact on your long-term plans. It’s always best to double check making any financial decisions:
- Traditional IRA Contribution Age Limit Removed
What changed: Starting in 2020 you can contribute to a traditional era no matter what your age as long as you and your spouse, if filling jointly, have earned income. You have until April 15, 2021, to make 2020 contributions, which could be deductible.
Next step: if you are age 70% or order, consult your financial advisor and tax advisor to determine if additional contributions make sense for your investment strategy.
What changed: if you inherit an IRA as a non-spouse beneficiary, and the IRA holder died on or after January 1, 2020, your options are limited. Most non-spouse beneficiaries and qualified look-through trusts will be considered a designed beneficiary (DB) and the account must be emptied by the end of the 10 th calendar year following the year of death of the IRA owner who has not reached the age of majority (yet to be defined), chronically ill or disabled individuals, or individuals not more than 10 years younger, the same age, or older than the IRA owner will still be able to take advantage of the stretch IRA strategy.
Stretching an IRA refers to the ability to take RMDs over the beneficiary’s single life expectancy (using the term-certain calculation method) rather than over the life expectancy of the original IRA owner.
Next Steps: If you inherit an IRA this year, check with your financial advisor to determine if this change might affect your distribution requirement and strategy. And if you have included an IRA in your estate plan for others to inherit after your death, check with your attorney to determine the possible impact on your estate planning strategy.
Year-End planning Checklist
Taking these six actions as soon as possible will help ensure your working towards our financial goals-and that you’re prepared for the upcoming tax season.
- Review your portfolio with your financial advisor to help ensure your allocation still aligns with our goals.
- Ask your financial advisor for a gain/loss report to access the income and / or capital gain you should expect this year.
- Determine whether the 0% capital gains rate will apply to you this year.
- Review tax-loss selling strategies if you have capital gains. If you wish to realize a loss but keep your exposure to a depreciated sector and security, remember November 30,2021 is the last day to double up a position to help avoid a wash sale.
- Meet with your tax advisor to prepare preliminary tax projections and evaluate whether to defer income or accelerate expenses.
- Determine if any adjustment is needed to tax withholding or estimated payments.
(Saghir A. Aslam only explains strategies and formulas that he has been using. He is merely providing information, and NO ADVICE is given. Mr Aslam does not endorse or recommend any brokerage firm, or any investment at all, nor does he suggest that anyone will earn a profit when or if they purchase stocks, bonds or any other investments. All stocks and investments vehicles mentioned are for illustrative purposes only. Mr Aslam is not an attorney, accountant, real estate broker, stockbroker, investment advisor, or certified financial planner. Mr Aslam does not have anything for sale.)
