Retirement Tax Planning for the Pandemic and What You Need to Know

In the wake of COVID-19, many retirees, and those inching toward retirement are facing various challenges. Priorities have shifted, (do you buy groceries yourself or have you put savings on the back burner and now spare a little extra for delivery?) and the confidence people once had in their financial future has evaporated, making retirement tax planning during these trying times a scary proposition. However, today more than ever, knowledge truly is power, and by understanding your environment and making a few preparations, you can position yourself for a long, happy retirement, even amid the “new normal” evoked by the pandemic.

Issues to beware of

With the Great Depression not yet a century old, many analysts feared the pandemic would provoke a repeat of that level of economic devastation for current generations. Fortunately though, many now agree with some certainty that what we’ll experience is a recession, not a depression, which is certainly good news. However, other tax issues could possibly present themselves as the nation tries to recover and repair from the pandemic, having an adverse impact on those preparing to retire:

  • Higher taxes: To help minimize the impacts of the pandemic on individuals and families, The US government passed a $2 trillion stimulus program, in turn increasing the national debt. However, the money spent has to be replenished back to the government some time, somehow. It’s highly possible that replenishment could derive from increased taxes. For instance, during World War II, the top individual tax rate rose and remained that way for twenty years before finally decreasing. Thus, providing proof that tax hikes do happen, and are likely after a global crisis.
  • The wealthiest might be most impacted: Countries use taxes to offset the costs of major events like economic downturns and pandemics. If and when taxes do increase, there’s a high possibility that the wealthiest will be most impacted, paying higher taxes. This could offset well-laid retirement plans if you suddenly find a big chunk of your money being funneled to Uncle Sam.
  • Uncertainty about strategies: There’s no surefire way to predict exactly what tax measures the country might ultimately take to help secure funds and repair the economy for the future. For example, will income taxes be targeted? Will investors be charged more on capital gain? It’s too soon to say just yet, but this level of ambiguity is not reassuring in the least for someone preparing to retire.

If you are nearing retirement, keeping food on the table and your job in place until the home stretch can be stressful enough without having to worry about the uncertainty surrounding taxes. Some helpful pointers can, however, help reduce the stress.

Tips for coping with the post-pandemic tax landscape

The words “pandemic,” “retirement” and “taxes” are enough to throw anyone into a tizzy. Fortunately, if you’re already retired or getting close, these tips will help you keep calm and beat the tax blues.

Know the CARES Act

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) enforced in March 2020 is a beacon of hope for many retirees. The act provides special options and exemptions for retirement plans, such as allowing individuals to pull up to $100,000 of COVID-19-related distributions from eligible plans like IRAs, 401k’s and 403(b) plans. Also, the act increases how much you can borrow from eligible retirement plans (excluding IRAs), giving qualified individuals up to one year to repay loans from their plan. However, avoid taking this route if you can help it. Don’t pull money unless you have to because it will only decrease your retirement savings and potentially harm you financially in the future.

Another advantage, any Covid-19-related distributions you take do not incur the 10% additional tax on early distributions. In essence, you’ll be exempt from paying the 10% for distributions made from your retirement plan or IRA as long as they are COVID-19-related. Qualified individuals over the age of 59.5 can designate an eligible distribution to be COVID-19-related as long as the amount designated doesn’t exceed $100,000. More details are available on the IRS website.

Think before you pull

You might start to see a change in your retirement savings, but pulling money out without understanding the repercussions could cost you in taxes. For instance, you may start to see your stock portfolio decrease in value, and it could be tempting to sell everything before matters grow worse. However, that will most likely cost you more in the long run because the stock market, by its nature, rises and falls, so even if it’s experiencing a low point right now, it’s likely to make an equally steady rebound.

Another instance when you should think before you act is with IRAs. Typically, you can withdraw money from your Roth IRA whenever you please, tax- and penalty-free, which makes it a promising option if you’re in need of immediate funds. But know that if you make an unqualified withdrawal for money earned through investments, you’ll probably be charged both taxes and penalties on those funds.

Consider transitioning from tax-deferred accounts to other retirement accounts

In the early years of retirement, planning and saving using tax-deferred retirement accounts like 401(k)s and traditional IRAs hold a lot of appeal. You know taxes are deferred on those funds until much later when it’s time to retire. However, with the current tax concerns, as you near retirement you should consider transitioning those accounts over to non-deferred options like Roth accounts. While you will need to pay taxes when you convert from one account to the other, if tax rates do hike in the future as predicted, you’ll end up paying at a lower rate today than at a higher rate if you wait until later. Once you pay the conversion taxes, you can then safely make nontaxable withdrawals when you retire, potentially saving you hundreds if not thousands of dollars in the process.

Here to help

When it comes to retirement tax planning, things can get intimidating and scary. But with the right professionals by your side, they don’t have to be. That’s where Financial & Tax Architects (FTA) comes in. At FTA, our goal is to provide clients with a worry-free retirement. We have expert advisors ready to help educate you on retirement best practices, such as how to prevent making tax blunders and save money on taxes during the crucial milestone of retirement. Contact us today to schedule a discovery call and find out how we can help.

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The opinions expressed by featured authors are their own and may not accurately reflect those of Financial & Tax Architects, Inc. This article is for general information only and is not intended to serve as specific financial, accounting or tax advice. Individuals should speak with qualified professionals based upon their individual circumstances. The analysis contained in this article may be based upon third-party information and may become outdated or otherwise superseded without notice. Third-party information is deemed to be reliable, but its accuracy and completeness cannot be guaranteed.

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