As we all prepare for tax season after an unprecedented year, the federal and state government has enacted many changes that will impact tax filings. While some originate with the economic stimulus package known as the CARES Act, some came from the SECURE Act of 2019. Here are some of the important changes to taxes as they relate to retirement and investment accounts.
New Rules for Required Minimum Distributions (RMDs)
RMDs are minimum withdrawal amounts that are required annually from certain retirement accounts. The SECURE Act changed the age at which these withdrawals must begin from age 70 ½ years to age 72 (but only if you turn 70 ½ after 2019). Under the CARES Act, seniors were not required to take minimum distributions (RMDs) in 2020.
Making Additional Retirement Contributions
Both acts have also changed the rules regarding contributions to various retirement and savings accounts. If you have a traditional IRA and are over 70 ½, you can now continue to make contributions to this account if you have earned income. You can also add more money to your accounts:
- With a 401(k), you can contribute up to $19,500 annually, for anyone age 50 or over the maximum contribution is $26,000 for 2021.
- Individuals with SIMPLE IRAs can contribute up to $13,500, while those age 50 or over can contribute $16,500.
- Traditional IRAs and Roth IRAs have a $6,000 limit, and if you are age 50 or over you can contribute an additional $1,000.
Retirement Contribution Date Changes
While 401(k) contributions had to be made prior to December 31, 2020, traditional and Roth IRA contributions can be made until April 15, 2021 to apply to the 2020 tax year.
Impacts of Capital Gains Changes
The capital gains tax is applied to assets you sell that have appreciated in value. The changes for 2020 did not impact the tax rates on capital gains. However, capital gains taxes are determined by income thresholds, and these did change. This year, the rate is 0% if you file as a single person with a taxable income up to $40,000; a head-of-household with taxable income up to $53,600; and a joint filing up to $80,000. The capital gains tax rate is 15% for those single filers earning between $40,000 and $441,451; head-of-households earning between $53,600 and $469,051; and joint filers earning between $80,000 and $496,601. Those earning above these upper limits are taxed at a 20% rate on their capital gains.
Qualified Withdrawal Tax Changes
Normally, withdrawing from eligible retirement plans and IRAs before you reach 59 ½ will incur a 10% early tax penalty in addition to the ordinary income taxes due on the distribution. However, in 2020 the IRS determined that qualified individuals experiencing hardship because of COVID-19 could withdraw up to $100,000 and avoid the 10% premature withdrawal penalty. These distributions remain subject to income tax, however the tax can be paid over the next three years. In addition, the CARES act provides an opportunity to repay the amount of qualified COVID related withdrawals without tax, if the repayment occurs within three years.
While there are many other changes to taxes and deductions for 2020, these are some of the most important changes for retirement, savings, and investment accounts. The IRS has also announced that they will begin accepting returns for 2020 on February 12, 2021, and has advised individuals to file electronically for the fastest process time.
Marshall Financial Group is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.