Time Running Short on 2020-Specific Planning Opportunities

Nov 30, 2020

Now is the time for CPAs to connect with their clients for financial planning before this year’s opportunities are gone. Given the outbreak of the pandemic, subsequent legislative action passed in the CARES Act, labor cutbacks, and volatility in financial markets, the end of 2020 has become a prime moment when you can assist clients and, when possible, take advantage of a favorable planning environment.

With passage of the CARES Act, Congress suspended all required minimum distributions (RMDs) from retirement accounts for 2020. They did this over several months as they refined the rules, and are allowing those distributions taken by Aug. 31 to be repaid. For RMDs taken after Aug. 31, 2020, owners would have to use the 60-day rule to return the distribution. This is important for those clients who do not need the money and may have forgotten that they have automatic RMDs scheduled for year-end. Clients have 60 days from the distribution to put it back, even if that 60-day period takes them into 2021. Extra coordination to return tax withholdings may be needed, as well as a thorough understanding of the rollover rules. This return benefit may offer an income tax savings or an opportunity for conversions.

If converting the same amount to a Roth IRA, the tax savings are not seen today but on the future growth of the Roth. Tax rates could be higher in the future, so this presents an opportunity to shift future taxable dollars to tax-free dollars for the client’s future. A conversion does not have to be limited to the amount of an RMD. It can be more or less, depending on the client’s specific tax projection and needs.

Given the current economic environment and labor market, clients may want to consider retiring sooner or potentially face reduced hours or loss of a job. Inquire as to your clients’ plans or intentions to understand their cash flow needs. If a client is leaving a job or losing one, be sure to review their health insurance and the applicability of COBRA, marketplace insurance, or Medicare if age 65. If clients continue to work and are concerned with their current cash flow being compromised, contributions to a retirement plan may be reduced to accommodate a household budget. For those under age 59 ½, taking a distribution or loan from a retirement account may be an option offered under CARES Act provisions. Understanding access to retirement benefits at this time could make the difference. Reviewing a client’s 401(k) or other retirement plans is a productive first step for future benefits.

In addition to 401(k) or other defined contribution plans, clients may still have a defined benefit component (or pension) within their retirement package. Upon retirement or termination, a pension may offer various options that could include an annuity of guaranteed payments for life or a lump-sum distribution of cash today. In a historically low-interest-rate environment, the present value of annuity payments as a lump sum could be attractive with the option to roll it over to a self-directed IRA. This assures receipt of the benefit in the event of a premature death and would allow flexibility in the tax planning for lifetime distributions. An annuity may make sense for those who want that guaranteed monthly amount. A cost-benefit calculation should be performed that considers other life factors, such as health, marital status, cash needs, heirs’ needs, and other retirement assets. Asking about pension options prior to retirement or termination informs the decision.

Market volatility this year also created the opportunity for a strategy referred to as tax-loss harvesting. The premise of tax-loss harvesting is to sell investment positions at a loss and replace them with positions of similar strategy or objective. This allows investors to stay invested to avoid missing the upside but also to realize the loss to offset capital gains. While the best opportunity to execute a tax-loss harvesting strategy is at or near market lows, there is still time before the end of the year to capitalize. Some sectors have outperformed others since the end of March, leaving some investment assets that have not fully recovered available for this strategy. Ongoing volatility through 2020 opens the door for further opportunities and any unused losses may be carried forward to future years.

There is no handbook for a year like 2020. CPAs have had to dig into the details of legislation and policy more this year than any in recent memory. CPAs often excel at interpreting complicated language, yet true value is provided while applying it to clients and explaining how it affects their personal financial lives. Upon reflection, this year has proven that advice is a CPA’s most valuable commodity, relationships are imperative, and trust is paramount. There is still time to use what was learned this year to finalize 2020 planning or anticipate 2021 hiccups. Opportunities abound from a planning perspective that will elevate a CPA’s position in clients’ minds from tax preparer to trusted adviser at the most sensitive of times.


William K. Velekei, CPA, CFP, is a senior financial adviser at Corbenic Partners and the president of PICPA’s Lehigh Valley Chapter. He can be reached at wvelekei@corbenicpartners.com.

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