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Please consult your tax advisor for more detailed information regarding the Roth IRA or for advice regarding your individual situation.
Taxes are deferred until withdrawal if the requirements are met. A 10% penalty may be imposed for withdrawal prior to reaching age 59½.
Forget the Ghosts: 9 Ways to Bust Tax-Time Specters
Tax time may not be as frightening as things that go bump in the night, but many are haunted by ghosts of tax days past. Take care of a few decisions now—some of which have a Dec. 31 deadline—to help ease the dread of a hair-raising experience next April.
Before making any decisions, have a good idea about your income level so you can estimate your marginal tax bracket . That can help you know if it makes sense to act now or wait until next year on some decisions.
Prepare Now for No Tricks, Just Treats at Tax Time
Make decisions for tax-time now with nine year-end tax considerations. These reminders might help reduce what you owe or increase your refund.
1. Review Thrills and Chills of Gains or Losses
When you withdraw money from your taxable investments, you'll have either a capital gain or loss, depending on whether you made or lost money with your sale. Selling with a gain means you'll owe additional taxes on the amount over your cost basis. You might be able to offset gains by selling other investments at a loss. If it makes sense to sell securities that have lost value, consider that option as a way to lower your tax bill.
2. Don't Get Tricked by the Rebalancing Trade Date
If you plan to rebalance your portfolio, transactions in a taxable account will trigger a gain or loss for each account. Keep in mind that the trade date of your transactions determines the year in which potential taxes will be due. Also, be aware of year-end distribution dates. Purchasing new shares on or before the dividend date means you also receive the fund's income and capital gain payments, if any.
3. Carve Out a Strategy for Roth Conversions
If you're considering converting part or all your Traditional IRA to a Roth IRA, you'll owe taxes on any contributions and earnings not previously taxed. Decide if you want to pay taxes on the conversion this year or postpone that until next year. To spread the taxes over multiple years, you might want to do a partial conversion.
4. Contribute to Retirement for Potential Sweet Savings
Whether you contribute in a Traditional or Roth IRA, you benefit from tax-advantaged investing. While IRAs allow you to make 2020 contributions until Tax Day, contributing earlier means more time in the market for your dollars to grow. Take note: If you're eligible, you might be able to deduct Traditional IRA contributions.
5. Review RMD Details to Avoid Scary Penalties Next Year
This year brought significant changes for required minimum distributions (RMDs) from IRAs and certain retirement plan accounts. It's a good idea to know what changed and plan for 2021.
The SECURE Act changed the RMD age as follows:
- If you were born on or after 7/1/1949, you aren't required to begin RMDs until you reach age 72.
- If you were born before 7/1/1949, the SECURE Act didn't change your RMD starting age, which remains age 70½.
In March, the CARES Act waived RMDs for 2020, including first-year 2019 RMDs that were due April 1, 2020. If you took an RMD without realizing it was waived, you may be able to return it as a 60-day indirect rollover, but only if it's been within 60 days. Rolling your 2020 RMD back within the 60-day deadline does NOT count towards the IRS restriction of allowing one indirect rollover every 12 months.
Note that the waiver only applies to 2020 RMDs and it may be a good idea to start thinking about your 2021 distribution. That includes making sure you take enough to avoid the 50% tax penalty on any amount of your RMD that you fail to take.
6. Unmask Deductions With 529 Plan Contributions
Unlike IRA contributions, purchases into 529 Education Savings Plans must be made by year-end to take advantage of any state deductions for 2020, if applicable. Anyone—related or not—may be able to take a deduction for contributions to your student's account, depending on their state's tax laws.
7. Assess Education Expenses to Scare Up More
If you have a student in college, you might be able to deduct education-related costs. Review your anticipated income to determine if you want to spend the money now to take advantage of those deductions this year or wait until 2021. You may also be eligible for educational credits , such as the American Opportunity Tax Credit and the Lifetime Learning Credit .
8. Consider Charitable Donations for Treats All Around
Donating your taxable investments presents a win-win situation for the qualified organization of your choice and you. When you donate securities in-kind, you don't pay taxes on the appreciation—and you may also receive a deduction. Refer to the IRS website or talk to your tax advisor for details.
9. Know Gifting Limits to Foil Ghoulish Results
If you're planning to reduce your estate by making gifts to family, take note of the annual exemption . As of 2020, the IRS allows you to give up to $15,000 per person per year without incurring gift taxes. You can still give more than the limit per year to an individual and not incur gift tax, but you must report it and count it towards your lifetime exemption amount ($11.58 million in 2020 ).
Plan Ahead for Less Bubble, Bubble Taxes and Trouble
Looking ahead has its benefits. Early tax planning lets you make money-saving decisions before time runs out. And, the more money you save from taxes, the more you have to invest toward your investment goals.
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IRS Circular 230 Disclosure: American Century Companies, Inc. and its affiliates do not provide tax advice. Accordingly, any discussion of U.S. tax matters contained herein (including any attachments) is not intended or written to be used, and cannot be used, in connection with the promotion, marketing or recommendation by anyone unaffiliated with American Century Companies, Inc. of any of the matters addressed herein or for the purpose of avoiding U.S. tax-related penalties.
This information is for educational purposes only and is not intended as tax advice. Please consult your tax advisor for more detailed information or for advice regarding your individual situation.
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IRA investment earnings are not taxed. Depending on the type of IRA and certain other factors, these earnings, as well as the original contributions, may be taxed at your ordinary income tax rate upon withdrawal. A 10% penalty may be imposed for early withdrawal before age 59½.
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Exchange Traded Funds (ETFs) are bought and sold through exchange trading at market price (not NAV), and are not individually redeemed from the fund. Shares may trade at a premium or discount to their NAV in the secondary market. Brokerage commissions will reduce returns.
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Investment return and principal value of security investments will fluctuate. The value at the time of redemption may be more or less than the original cost. Past performance is no guarantee of future results.
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The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments' portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.
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