Year-End Opportunities

This year has undoubtedly been filled with many challenges for all of us. It can be unnerving to look back on a year that has felt almost unbearable at times. However, with every challenge, there are lessons to learn and opportunities to seize. One opportunity we all have is to cherish the many freedoms we had. In retrospect, we can see how incredible our freedom is - freedom to work, go to school, visit a grandparent, or to gather with friends in the community. This recognition of our freedoms is something that I hope society does not soon forget once the pandemic has passed.

Other opportunities were created this year that may have an immediate impact on those in retirement. Specifically, a pause in required minimum distributions this year, more deductions for charitable giving, and changes to our investments have all created a unique chance for many during this holiday season.

Most retirees will benefit from the suspension of required minimum distributions (RMDs) in 2020. That’s because the Coronavirus Aid, Relief and Economic Security (CARES) Act, which was enacted this spring in response to the pandemic, put a pause on RMDs. Combine this change with low tax levels today relative to history, and some retirees may find themselves in a lower tax bracket than years past.

This could be a year to improve the tax efficiency of a retiree’s overall portfolio. A key strategy to consider is whether to convert some traditional IRA assets to a ROTH IRA. There are two key advantages to this strategy. The first is the ability to take tax-free withdrawals from the ROTH IRA in later years. The second is the ROTH IRA is not subject to RMDs in the future. With that said, ROTH conversions can create taxable income the year they are executed. It is important to discuss these options with a tax advisor. Specifically, retirees will want to understand the implications of converting IRA balances that consist of pre-tax and post-tax contributions; they will also want to consider how it may impact their Medicare surcharges.

Next, there is another opportunity for those looking to give a gift during this holiday season. The economic impact on many families, businesses and charities has been catastrophic. The CARES ACT also gave incentives to those taxpayers who are charitably inclined this year. For taxpayers who take the standard deduction, they will be able to claim up to $300 in charitable contributions as an above-the-line deduction. This is excellent news for most Americans who now take a standard deduction when filing their taxes. For many, this is another reason to help someone less fortunate this year.

Tax-loss selling can be a useful process as we approach year-end. While many markets have seen a full recovery from lows earlier in the year, there may still be opportunities. Growth-oriented stocks and funds have seen positive results, but value stocks have not done as well. Investors may be able to recognize some losses in their taxable accounts before the end of the year. Recognizing losses can be used to offset gains experience in the portfolio or be used against ordinary income up to $3,000. This is another topic to discuss with a tax advisor.

Lastly, December is an excellent month to plan for what 2021 might bring. It may be an opportune time to revisit a portfolio’s asset allocation with such a quick market recovery. An investor’s asset allocation determines the majority of their success in the market. Retirees should make sure their exposure to cash, stocks and bonds aligns with their future needs. They should understand their cash flow requirements for next year and have a game plan for which account this cash will come from. Be proactive and get prepared; these are two things everyone can do for a less stressful 2021.

Frederick Cassilly is registered as an investment adviser with Cassilly Financial Group, a registered investment adviser in the state of Maryland and Virginia. Cassilly Financial Group only transacts business in states where it is properly registered or is excluded or exempted from registration requirements.

Information contained herein does not involve the rendering of personalized investment advice but is limited to the dissemination of general information. A professional adviser should be consulted before implementing any of the strategies or options presented.