Year-End Planning: Roth Conversions and CA Proposition 19 Impacts
As year-end approaches, it is important to address any unresolved planning or tax issues for 2020 and ensure you are on track for 2021.
Year-End 2020 Planning Opportunity Checklist
Now is an ideal time to review year-end tax strategies and plan for the year ahead. Below are some important items that should be completed or reviewed before year-end:
- Required Minimum Distributions – As part of the CARES Act, all 2020 RMDs from defined contribution plans, including 401(K) plans, 403(b) plans or IRAs have been waived.
- Roth IRA Conversions – If you expect to be in a low-income tax bracket this year, now may be a good time to make Roth IRA conversions. Because many individuals have not been required to take RMDs this year as a result of the CARES Act, this year may be a good time to complete a Roth IRA Conversion as an alternative. High-income taxpayers with little or no existing pre-tax IRA assets can also make non-deductible IRA contributions and later convert these funds to a Roth IRA (known as a backdoor Roth IRA conversion).
- Year-end Gifting – If you have not already done so, review your 2020 charitable and family gifting goals to ensure you are accomplishing your goals in a tax-efficient manner. There are several strategies depending on specific circumstances that a WESCAP advisor can recommend depending on your situation.
Year-End 2020 Tax-Related Investment Strategies
- Harvest Losses – As we approach the year’s end, it can be productive to harvest losses in your portfolio to offset potential capital gains or to generate capital loss carry forwards.
- Avoid Large Capital Gains – Review mutual fund holdings and look to avoid significant year-end capital gains distributions by selling these funds prior to record date. Additionally, you should avoid purchasing some mutual funds toward the end of the year in taxable accounts, instead using ETFs to avoid capital gains distributions.
- Harvest Tax-Advantaged Capital Gains – If individuals have low enough taxable income, it may be prudent to harvest capital gains, as federal capital gains tax rates may be as low as 0%.
- Possible Higher Future Tax Rates – If tax rate increases are expected, it may make sense to sell assets in 2020 to avoid higher rates.
General Planning Opportunities
- California Proposition 19 – The recent
passage of Proposition 19 could affect the manner in which parents transfer
(either by gift, sale, or inheritance) California property to their children,
largely eliminating the ability to avoid property tax reassessment of real
estate. The major changes for post
February 16, 2021 real estate transfers that affect parent/child property tax
reassessments are as follows:
- If the property transferred to a child is the parents’ primary residence and becomes the primary residence of the child, the property will not be reassessed to current value for tax purposes as long as the difference between current and assessed value is less than $1 million.
- For all other properties not considered a primary residence that are gifted, sold or inherited by a child or grandchild, the property is reassessed to full market value. No exclusion will exist.
- Prop. 19 expands the tax benefit for California residents who are at least age 55, disabled or affected by natural disasters by allowing them to transfer their original primary residence property assessed value to a new home, regardless of the price of the new home.
- Qualified Charitable Donations – This may not apply to all; however, due to the Tax Cuts and Jobs Act and the loss or limitation of certain itemized deductions, some charitably-inclined individuals may choose to accomplish their charitable goals through donations out of their IRA, utilizing a portion, or all, of their Required Minimum Distribution, up to $100,000. As there are no RMDs this year, 2021 may be a better year to consider this strategy.
- Charitable Gifting – Consider a “bunching” strategy for gifting due to tax law changes to ensure you are maximizing the tax benefits for your charitable donations.
- Retirement Projections – WESCAP Group offers retirement income projections to ensure you remain on track to meet your long-term goals. We recommend this for individuals who are currently concerned about their long-term financial security or are expecting significant life or financial changes in the near future.
- Social Security Analysis – If you are approaching 62 and would like to discuss the optimal strategy to begin taking Social Security benefits, WESCAP can assist in making this decision.
- Education Funding – Consider funding a 529 account for your child or other relations. You can contribute up to $15,000 per donor per child this year, or even super-fund an account with up to $75,000 in funding per recipient in your first year of funding.
As always, these specific planning items will not apply to everyone. It is important to discuss these opportunities and strategies with your WESCAP advisor.
Please let us know if you have any questions about these items or if you would like to schedule a time to talk about your specific situation with your WESCAP advisor.
Kind regards,
WESCAP Group
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