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If you have a traditional IRA, now is a good time to consider converting it into a Roth IRA. Let’s first understand why you would want to convert a traditional IRA into a Roth IRA to begin with. One big reason is that at the time of withdrawing funds from a traditional IRA, any money you’ve earned on the investments in your account is taxable, along with all contributions you may have deducted from your taxes before withdrawal. On the other hand, withdrawals from Roth IRAs are not taxable, as these accounts are set up with post-tax income. Another benefit of Roth IRAs is that your money continues to grow tax-free regardless of your age, unlike traditional IRAs which force you to withdraw money in the form of required minimum distributions each year after the age of 72 (70.5 years, in case you hit that number before 2020).
Why it matters now
The gains your investments make are subject to capital gains tax in the normal course of business. Tax loss harvesting is a way of reducing this tax liability, by selling off investments that made a loss.
Why it matters now
Gifting assets, such as securities, to your loved ones may incur lower taxes given the possible reduction in their value during the current crisis. Keep in mind that the current gift tax exemption is $11.58 million and the annual gift tax exclusion is $15,000, as you plan your gifting. These limits may be subject to change if a Democratic candidate wins the Presidential election in November, so now is the time to act.
A combination of low interest rates and reduced asset values makes this the perfect time to fund any trusts that you may have set up for your heirs or for charitable purposes. This includes trusts like the Grantor Retained Annuity Trust (GRATs), Charitable Lead Trusts (CLTs) and Intentionally Defective Grantor Trusts (IDGTs).
It makes sense to refinance outstanding loans at lower rates, when interest rates drop. This extends to any outstanding notes to trusts or loans to children, as well. If you have an existing IDGT in place, make sure you don’t miss the opportunity to refinance at these lower rates.
The GST or Generation Skipping Transfer tax applies to trusts or gifts given to younger skip generations (e.g., grandchildren). With the GST exemption, only the portion of gifts or transfers that exceeds $11.8 million are taxable.
With a likely drop in value of your trust assets in the current scenario, you might want to consider delaying the allocation of the GST exemption. With proposals from Democratic candidates to lower the GST exemption rate to $3.5 million, now is a good time to opt for late GST exemption allocation.
If the value of assets belonging to a loved one who passed in 2020 has reduced since the coronavirus pandemic, it makes sense to opt for an Alternate Valuation Date (AVD) which is six months after death to reduce federal and state estate taxes. Discuss this option with an estate attorney, as this move can impact the tax basis of the assets in the hands of the estate’s beneficiaries.
As we’ve seen above, even though the current crisis in world markets may have negatively impacted many of our investments and assets, there are ways to mitigate losses and preserve value in this situation. If you have access to an Ayco advisor, reach out to discuss your options with them to understand the impact on your taxes as well as your future finances.
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Updated for tax year 2020
Updated for tax year 2019