Ten Financial Protection Measures for Affluent Individuals to Consider During the Current Economic Landscape

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Insights  <  Ten Financial Protection Measures for Affluent Individuals to Consider During the Current Economic Landscape

Times are tougher for everyone these days – yes, even for those fortunate enough to have amassed considerable reserves. It doesn’t take much for decades of saving and wise investments to dwindle during an open-ended rocky economy. The current situation has spawned government relief, opportunities and risks. Following are ten things to consider during these challenging times.

1. Roth Conversions

The COVID-19 crisis and subsequent financial fall-out has created an opportunity for Roth conversions at an affordable tax cost while gaining some insurance against future tax rate increases. Unlike withdrawals from traditional IRAs, qualified Roth IRA withdrawals are federal income tax-free and often also state income tax-free.

2. Delay of RMD Payments:

Under the Coronavirus Aid, Relief and Economic Security (CARES) Act, Required Minimum Distributions (RMDs) from retirement savings accounts during 2020 are waived, granting a reprieve for retirees who might have had to sell low and suffer a loss. As it now stands, retirees who can afford to skip their 2020 distribution can let that money ride an extra year in their retirement plans without penalty.

3. Increase in RMD Age:

The Setting Every Community Up for Retirement Enhancement Act (SECURE) Act that was enacted in December 2019 increased the age retirees are required to start taking their RMD. Prior to the SECURE Act, retirees were required to start taking their RMD at age 70½; now they can wait until 72.

4. Income Spread:

In 2020, qualified coronavirus-related retirement plan distributions of up to $100,000 can be reported as income over a three-year spread; are not subject to penalty; and can be re-contributed back into a retirement plan tax-free within three years.

5. Charitable Contribution Percentage:

The CARES Act modifies the Adjusted Gross Income (AGI) limitation for charitable contributions, allowing individual donors to deduct qualified cash donations of up to 100% of their AGI.

6. Higher Lifetime Gift Tax Exemption:

The lifetime gift tax exemption is $11.58 million per individual in 2020, which means you can give up to that amount in gifts over the course of your lifetime without having to pay gift tax. Married couples get a double benefit – each spouse can gift $11.58 million for a total of $23.16 million gift tax-free. This high lifetime exemption is only available through 2025 under current law and there is always a chance that Congress may change the law and reduce the exemption amount sooner.

7. Gifting in a Depressed Asset Environment:

The current low interest rates and depressed asset values have created some unique opportunities to transfer substantial amounts of wealth while using less of your gift tax exemption. One such opportunity is simple outright gifting of assets with temporarily depressed values—but which are expected to increase in value in the future. Another more sophisticated possibility is a gift of assets to a Grantor Retained Annuity Trust (GRAT). GRATs are particularly appealing now given the low IRS published interest rates.

8. Properly Title Assets:

Do not overlook the importance of properly titling assets, otherwise they may not be distributed upon your death as intended.

9. IRA/401(k) Beneficiaries:

Under the new SECURE Act, most non-spouse beneficiaries must withdraw all funds in an inherited retirement account by the end of the 10th year after the original account owner’s year of death; therefore, a non-spouse beneficiary can choose to wait until the 10 years have passed or take distributions of any amount in any year from 1-10, whether to either meet income needs or reduce overall taxes. This law change, along with the health concerns of the pandemic, makes review of your beneficiary designation even more important.

10. Identity Protection:

Fraudulent tax return filings have become an increased source of “income” for cyber criminals. Beware of phishers; practice safe computing and keep a tight rein on sharing personal financial information, whether online or through word of mouth.

In future columns, we’ll examine each of these measures in more detail.

COVID-19 Business Resources

Disclaimer:  The contents of this resource are for general informational purposes only. While every effort has been made to ensure its accuracy, the information is provided “as is” and no representations are made that the content is error-free. We have no obligation to update any content, comments or other information for retroactive or prospective interpretations or guidance provided by regulators, financial institutions or others. The information is not intended to constitute legal advice or replace the advice of a qualified professional. There are areas of the CARES Act where additional clarification from the Treasury Department and the SBA is needed. Your judgment and interpretation of the act may be needed. Users should consult with their legal counsel and representatives of the lending institution regarding the proper completion of their application and supporting documentation.

Any written tax content, comments, or advice contained in this article is limited to the matters specifically set forth herein. Such content, comments, or advice may be based on tax statutes, regulations, and administrative and judicial interpretations thereof and we have no obligation to update any content, comments or advice for retroactive or prospective changes to such authorities. This communication is not intended to address the potential application of penalties and interest, for which the taxpayer is responsible, that may be imposed for non-compliance with tax law. 

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