2021 Retirement Tax Planning Tips


James Russell Lipford Jr., a special contributor, and partner of CLH CPAs, LLC, a certified public accountancy firm in Warner Robins, wants to help you get your new year off to a great start with the following tax retirement tips.

How much longer will we benefit from the Tax Cuts and Jobs Act of 2017? Now that Joe Biden is the 46th president of the United States, many Americans wonder if he will fulfill his campaign promise of increased taxes.

Regardless of the outcome, economists and financial professionals agree that our current tax structure cannot sustain current spending levels. The U.S. budget deficit for the fiscal year 2020 was $3.1 trillion. The National Debt was $26.9 trillion as of September 30, 2020. Are retirement accounts and retirement deductions an easy target for Congress, which has the power to tax and spend? The window for optimal tax planning with retirement accounts may be closing. I want to offer a few points to ponder.

Could 2021 be a good year to convert a traditional IRA to a ROTH? If asset values are depressed or your 2021 taxable income can be lowered or will be lower, you may want to entertain a conversion. I have noticed in the current tax environment that many clients have not enjoyed a reduced tax rate in retirement, and the Biden tax plan promises further tax increases. Conversion today could lock in today’s lower tax rates, allow the account to grow income tax-free, and avoid oft hated taxable Required Minimum Distributions (RMDs) during your and your spouse’s lifetimes.

Taxable RMDs can be especially painful due to increased taxes on widows or widowers whose filing status changes from married filing joint to single. In contrast, their taxable income remains substantially the same. Taxable RMDs can also be painful to non-spousal beneficiaries of inherited traditional IRAs who can no longer benefit from the “stretch IRA” rules after your death but must now withdraw the assets over a shorter period of 10 years. The SECURE Act eliminated the “stretch IRA.”

Many taxpayers no longer benefit from charitable contributions as an itemized deduction due to the higher standard deduction. If you are charitably minded, I suggest using your traditional IRA to fund highly tax-efficient philanthropic gifts like a Qualified Charitable Distribution (QCD), which are available for IRA owners over 70 ½. Some taxpayers may even be able to make a deductible traditional IRA contribution for 2020 by April 15, 2021, and then use the funds to accomplish a 2021 QCD.

Please include your CPA and financial advisor in any decisions regarding ROTH conversions, QCDs, and other planning techniques because of the various factors and complex tax rules involved. They have the experience and tools to help you make the best decisions.