• Matthew Boersen

3 Financial Steps to Do Before 2020

The end of a year is a good time to review basic financial strategies to make sure you maximize the benefit for 2020, while also preparing yourself better for the coming year.


Evaluate potential Roth Conversions

Roth conversions, unlike Roth contributions, do need to be processed by December 31 of each year. A Roth Conversion is converting pre-tax retirement funds in a 401(k) or Traditional IRA into after-tax retirement funds that will never be taxed again. You pay tax now, to save tax later.

It might be worth it for three reasons. First, if the investment has the potential to appreciate at higher rates than normal. By paying tax now on the value, but transferring it into a Roth, all future appreciation will occur with no tax owed. If you kept it inside an IRA, you would have to pay the government a portion of all that growth in the form of taxes at some point in retirement when you begin withdrawals. Secondly, if most or all of your retirement savings are in pre-tax 401(k) and IRAs, you should expect to need $60,000 or more in retirement income. Lastly, by only having pre-tax savings, along with Social Security to fund a $60,000+ retirement need, you will be paying higher tax rates than your tax bracket may suggest. Because Social Security taxation is based on other taxable income, pulling additional funds from an IRA not only makes those funds taxable, but also could have the ancillary effect of making more Social Security benefits taxable too. This is not true with Roth distributions, your tax rate today is expected to be lower than yours in retirement. For many people this is unlikely. Typically income needs drop in retirement, Social Security is only partially taxed and some states provide preferential tax treatment to retirement distributions. However in 2020, when many people have been laid off incomes are lower than usual. This may be one of the few exceptions where your tax rate for 2020 is lower than it may be in retirement.

Look for tax loss harvesting opportunities in your non retirement portfolio

For non retirement accounts, you can offset taxable capital gains by recognizing capital losses in other stocks and bonds. Additionally, if you have losses that exceed gains you can utilize up to $3,000 of those losses to offset other gains, and carry over the rest to other years where gains may appear. Just be careful of wash sale rules, which limit your ability to recognize a loss when you sell a security for a loss but repurchase the same security within 30 days.


Make last minute charitable gifts

Charitable gifts need to be mailed out by December 31 2020. For those over 70 ½ Qualified Charitable Distributions from IRAs may be a great option too. You can give up to $100,000 to charity directly from your IRA, and instead of having to recognize the income, and then hope to deduct the charitable contribution if you itemize, you can simply avoid the initial claiming of income from the beginning. This is way better than normal charitable giving, and can help not only reduce taxes, but ensure you get the full tax benefit of charitable giving, and potentially reduce the taxation on your Social Security benefits as well.


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