In June, CNBC.com discussed the implications of all of the money that fled into cash as a result of the pandemic-induced sell-off of stocks. They pointed out that some strategists believed that this flight to cash could soon rotate back into stocks, thereby causing the market to rise. This belief in the power of "cash on the sidelines" has an intuitive appeal. And why would you argue with "strategists?" But, their reasoning turns out to be false.
The overwhelming harm caused by the pandemic and the seemingly endless, hyper-partisan election season has led us to desire calm. So it's understandable that for Liz Ann Sonders, Chief Investment Strategist at Schwab, the present situation evokes The Rolling Stone's "Gimme Shelter." The following notes from the annual Schwab conference, which took place virtually last week, will hopefully provide some insight, if not calm.
Last week I sent around a survey asking how the pandemic has affected you and what you think the world will be like once we get past it.
Recent legislation enacted by Congress means that you do not have to take a Required Minimum Distribution (RMD) from your IRA in 2020. Nevertheless, you should carefully consider your options with respect to IRA withdrawals. Your decisions will impact not only your current income tax, but also, if applicable, your Medicare premiums and the taxable nature of your Social Security benefits. (Please see the Barron’s article for an excellent description of these issues.)
Even if you have not reached the RMD stage (age 72), many of the concepts below apply if you are older than 59-1/2. So what are your options with respect to money in your IRA?
If you do not need the money and do not want to pay taxes on a distribution, you may wish to do nothing. Not paying taxes may help you avoid: (1) an increase in your Medicare premiums for the year; and (2) the treatment of more of your Social Security benefits as being taxable for the year.
Take a Distribution
You may decide to take a distribution from your IRA in any event. Now may be a good time if you anticipate being in a lower tax bracket this year, especially if it is before you start receiving Social Security. Taking a distribution has the added advantage of lowering your RMDs in subsequent years (due to the reduced amount in your IRA).
Make a Qualified Charitable Distribution (QCD)
If you are at least 70-1/2 years old, you can make a distribution directly to a charity from a traditional IRA without it being included as taxable income. The limit is $100,000 per year per individual. A QCD will also lower the amount in your IRA subject to future RMDs. See the linked article for the rules and mechanics of making a QCD.
Convert Part of Your Traditional IRA into a Roth IRA
You can convert all or a portion of your traditional IRA into a Roth IRA. While this is a taxable event, it will lower your future income tax liabilities and help you bypass the Medicare and Social Security traps discussed above. It might make sense, for example, if your tax rate is lower this year or if your tax rate is lower than the expected IRA beneficiaries are. The details and the variables to consider are nicely summarized in the linked article.
I am happy to discuss how this applies to your particular situations. Please contact me if you wish to explore your options further. As always, all tax decisions should be done in consultation with your tax professional.
Words of Wisdom
Often when you think you're at the end of something, you're at the beginning of something else. -- Fred Rogers (on retirement)
After a precipitous drop in February and March due to the Covid-19 pandemic, the stock market has rebounded sharply, even with the recent pullback. The rise in stocks appears out of sync with an economy mired in a recession. What's up?
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