IRA and 401K Tax Considerations with CareAct of 2020

Putting money aside for retirement thru the use of IRA’s was always designed to help you save so that when you reached retirement you had a sizable nest egg to live off of. With a Roth IRA, you contribute after-tax dollars, your money grows tax-free, and you can generally make tax- and penalty-free withdrawals after age 59½. The Roth IRA was designed for individuals that believe they will be in a higher tax bracket when distributions begin. With a Traditional IRA, you contribute pre- or after-tax dollars, your money grows tax-deferred, and withdrawals are taxed as current income after age 59½. This was for someone who presumed they would be in a lower tax bracket when they begin taking distributions. 

Today, some are debating that taxes will have to go up given all the stimulus funds that are pouring into our economy due to COVID 19. If you agree that taxes will be increasing in the coming years, you may want to take advantage of the new Care Act 2020 which allows one single person to take $100,000 from their IRA without an early withdrawal penalty of 10%. Traditional IRA’s will still pay taxes on the capital gain, but the CARE ACT allows you to spread the gain over the next three years. If you have too much in a tax deferred bucket, you many want to take advantage of withdrawing some funds. You should always talk with your CPA to understand tax consequences before you do anything. As a parting thought, you may want to consider withdrawing up to $100,000 of your Traditional IRA and convert it to a Roth IRA. Although you will still have to pay on the growth of your capital gains, you will be able to take advantage of the tax free growth that exists with the Roth IRA. This becomes very appealing if you own real estate and wish to leave it to your children or grandchildren. This is how wealth is built. Again, it is recommended that you consult your IRA custodian and CPA to make sure you understand all the tax consequences before taking advantage of the tax changes associated with the Care Act of 2020. To learn more, please contact us at  Happy Investing