Critter Corner: IRAs and Taxes in 2020

Dear Ernie and Jannette,

As part of my retirement portfolio, I have IRAs. I’d like to make the most of these accounts and save money on my taxes both now and in the future. Do you have any tips that could help?

Ira Sentaxes

Dear Ira,

As you likely know, IRAs are useful investment vehicles to help you save for retirement. These are a few tidbits related to IRAs and taxes this year and for the future:

1. Maximum IRA contributions are the same in 2020 as 2019
There was no change in the IRA contribution limit for 2020 compared to last year’s limits. Those who haven’t yet reached age 50 can contribute a maximum of $6,000 for 2020. If you’re 50 or older, then you get to claim a $1,000 catch-up contribution, for a total of $7,000.

2. Traditional and Roth IRAs get taxed differently
There are two kinds of IRAs. Traditional IRAs are available to everyone, and they allow most people to take a tax deduction for the amount they contribute. For Roth IRAs, not everyone can contribute and for those that do, you’re not allowed to deduct your contributions on your current tax return. Instead, you can take Roth IRA withdrawals with no tax consequences once you reach retirement age (still 59 ½).

3. You still have time to make an IRA contribution for the 2019 tax year
One of the biggest benefits of IRAs is that you can make contributions up to the tax filing deadline. That gives you extra time, until April 15, to make 2019 contributions. Since 2020 has already started, you can also make 2020 contributions at any time this year.

4. Due to the SECURE Act provision affecting IRAs, action is needed now to avert a disaster when it comes to taxes later. Due to the new law, some people may want to consider revising their estate plans and consider converting traditional IRAs to a Roth IRAs. Rather than leaving tax-deferred retirement accounts to heirs, it may be better to do a Roth conversion, so your heirs receive tax-free assets. Please see today’s article for more details. (Link to it).

5. Donate your IRA to a charity for tax savings: Individuals age 70 ½ and older can distribute otherwise taxable IRA amounts directly to a tax-exempt charity. These distributions are called qualified charitable distributions, or (QCDs). The distributions are tax-free to the donor for federal purposes. And, it can reduce the amount of your Social Security benefits that are subject to taxes. The SECURE Act made no change to the age at which qualified charitable deductions may be made. That’s still 70½. Before giving charity and gifts, please read our Perils of Gifting FAQ.

Discuss Retirement Planning with Mr. Farr

Besides being a Certified Elder Law Attorney, Evan Farr is also an experienced retirement planning advisor and long-term care financial advisor through his financial services company, Lifecare Financial Services, LLC, which has been in business since 2006. Retirement planners generally work with people ages 55 and older, who are within 10-15 years or so of their desired retirement age. Learn more about our retirement planning services here.

Also, if you have your estate planning documents in order, make an appointment to review them and make necessary changes based on the provisions in the SECURE Act. If you want to ensure that your estate plan is always up-to-date, be sure to join the firm’s Lifetime Protection Program® the year after you sign your original documents.

Hope this is helpful!

Ernie and Janette

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About Renee Eder

Renee Eder is the Director of Public Relations for the Farr Law Firm, and gives the voice to the Critters of Critter Corner. Renee’s poodle, Penny, is an official comfort dog who she and her children bring to visit with seniors who are in the early stages of dementia at a local senior home once a month.