QSBS (Section 1202): A Tax Opportunity for Business Owners Planning to Retire

Posted On January 30, 2026 By Scott Stratton, CFP(R), CFA In Retirement Planning, Tax Strategies /

If you own a business and expect to sell it to fund your retirement, taxes matter — a lot.

For some owners, Qualified Small Business Stock (QSBS) can significantly reduce federal capital gains taxes when the business is sold. In some cases, you may be able to sell your business for $10 million or more and pay zero income taxes.

QSBS is powerful — but only if your business is structured correctly years before the sale.

This article explains QSBS in clear, practical terms for business owners, not accountants.

What Is QSBS — In Simple Terms?

QSBS is a tax rule that rewards people who build and own certain U.S. businesses.

If your business qualifies and you follow the rules, some or all of the profit from selling your business may not be subject to federal capital gains tax.

Although the law talks about “stock,” most owners should think of QSBS as applying to the sale of your business — whether that sale is to a buyer, private equity firm, or another company.

The One Rule That Matters Most: You Must Be a C-Corporation

To qualify for QSBS, your business must be structured as a C-Corporation. If your business is currently: an LLC, an S-Corporation, or a partnership, it does not qualify today.

The Planning Opportunity for 2026

Here’s the part many owners miss:

You can convert your business to a C-Corporation now, start the QSBS clock, and potentially sell the business tax-efficiently in the future.

For example:

Convert to a C-Corp in 2026
Operate as a C-Corp for several years (at least 3-5 years)
Sell the business later — often around retirement

QSBS is not retroactive. The clock starts when the C-Corp issues its shares. That’s why early planning matters, especially for owners who are 5–10 years from selling.

How Long Do You Have to Own the Business?

The required holding period depends on timing.

Older Rules

Historically, owners needed to hold the business more than five years to receive the full QSBS benefit.

New Rules (Effective for New Stock After July 4, 2025)

Under updated law:

Selling after 3 years may qualify for a 50% partial tax benefit
Selling after 4 years increases the benefit to 75%
Selling after 5 years provides the maximum benefit of 100%

This adds flexibility for owners whose retirement timelines may change.

How Much Tax Can QSBS Save?

If the new rules are met, QSBS may allow you to exclude up to $15 million of gain per owner from federal capital gains tax (subject to limits and specifics). For shares issued before July 2025, the limit is $10 million.

That can:

Reduce the tax impact of selling your business
Leave more capital available for retirement income
Lower exposure to surtaxes and Medicare premium surcharges

QSBS often fits naturally into broader Retirement Tax Planning discussions.

One Owner vs. Multiple Owners

Single-Owner Businesses

For solo owners, QSBS planning can be relatively straightforward:

Convert to a C-Corp
Hold long enough (ideally at least 5 years)
Sell the business
Potentially exclude all or a meaningful portion of the gain

Many owner-operators and founders fall into this category.

Businesses With Multiple Owners

Each owner is evaluated individually.

That means:

Each owner may qualify for their own QSBS exclusion
Ownership percentages and timing matter
Good planning can multiply the tax benefit across partners

This is especially relevant in closely held or family-owned businesses.

Can You Sell to a Partner or Employee?

Usually, QSBS works best when the business is sold to an outside buyer.

Selling your ownership directly to a business partner or an employee often does not qualify automatically for QSBS treatment. That said, some internal transitions can be structured carefully — but they require advance planning and coordination with tax and legal advisors.

If an internal sale is your expected exit, QSBS may still be part of the discussion, but it’s not guaranteed.

What Types of Businesses Typically Qualify?

QSBS generally applies to operating businesses, not investment vehicles.

Often eligible:

Manufacturing
Technology
Distribution
Construction
Certain service businesses

Often excluded:

Real estate holding companies
Investment, insurance, or financial businesses
Professional services such as law, engineering, architecture, accounting, actuarial science, performing arts, consulting, or athletics.
Other businesses where personal reputation is the primary asset

Why QSBS Matters for Retirement Planning

For many business owners, selling the company is:

Their largest financial event
The primary source of retirement funding

QSBS can:

Improve after-tax sale proceeds
Support sustainable retirement income planning
Reduce pressure around timing income and taxes

This often connects directly to:

Retirement Income Planning
Medicare and surtax planning
Estate and legacy planning

Final Thought

QSBS is not a last-minute strategy.

If you’re thinking about selling your business in the next several years, 2026 may be an important planning window to ask:

Should my business be a C-Corporation?
Does QSBS align with my retirement timeline?
What are the tradeoffs today versus future tax savings?

If you’re a business owner approaching retirement and want to understand how a future business sale fits into your broader tax and retirement plan, you’re welcome to request an introductory conversation. These discussions are educational and focused on planning — not products or performance.

Roth Conversions After 60: When They Make Sense—and When They Don’t

Posted On September 10, 2025 By Scott Stratton, CFP(R), CFA In Financial Planning, Tax Strategies /

For baby boomers and pre-retirees with $500,000 to $5 million in investable assets who want a fiduciary advisor they can work with remotely.

Roth conversions after age 60 can be a powerful tax-planning tool when used thoughtfully, but they are not automatically the best choice for every retiree. Whether a conversion makes sense depends on your current tax situation, future tax expectations, Social Security timing, Medicare implications, and retirement income goals.

What Is a Roth Conversion?

A Roth conversion moves money from a Traditional IRA or 401(k) into a Roth IRA by paying taxes now so that future growth and withdrawals are tax-free.
Traditional accounts grow tax-deferred and are taxed as ordinary income when withdrawn. In contrast, once assets are in a Roth IRA, they grow and can be withdrawn tax-free for life.

When Do Roth Conversions Make Sense?

Roth conversions generally make sense when you expect your current tax rate to be lower than your future tax rate or when tax diversification enhances your retirement plan.

Lower Tax Rates Now vs. Later

Converting in years when your income is relatively low — for example, after retiring but before taking Social Security — can result in paying less tax upfront.

Avoiding or Reducing Future RMDs

Roth IRAs do not have lifetime required minimum distributions (RMDs), unlike Traditional IRAs. Converting to a Roth can reduce future RMDs — here’s how to manage required minimum distributions.

Tax Diversification and Estate Planning

Having Roth assets provides flexibility in retirement withdrawals and can reduce the tax drag that comes with RMDs, while also offering a tax-free legacy to heirs.

Conversions in Lower-Value Markets

Converting during a market downturn means you pay tax on a lower base and allow the Roth portion to grow tax-free when the market recovers.

Roth conversions rarely make sense in isolation. They should be evaluated as part of a broader tax planning for retirees strategy that coordinates income, Medicare premiums, and future Required Minimum Distributions.

When Roth Conversions May Not Make Sense

Roth conversions are not always beneficial — especially if they trigger higher taxes or costly side effects.

Higher Current Tax Brackets

If converting pushes you into a much higher marginal tax bracket, the immediate tax cost may outweigh long-term tax benefits. For example, are you subject to the 3.8% Medicare Surtax?

Medicare IRMAA Impacts

Roth conversions increase MAGI and can affect Medicare premiums — learn how to reduce IRMAA.

Social Security Tax Interactions

Higher income from conversions may increase the taxable portion of Social Security benefits or affect tax bracket thresholds.

Charitable Goals or QCDs

If a large portion of your IRA assets will go to charity, converting may not be advantageous. Qualified Charitable Distributions (QCDs) can achieve similar goals without paying tax.

Low Future Tax Expectations

If your future tax rates will be lower — due to relocation to a no-tax state or anticipated lower income — conversions may have less value.

How to Evaluate a Roth Conversion

Proper evaluation requires side-by-side tax scenario analysis over your expected retirement horizon.

Project current vs. future tax rates
Consider Medicare, Social Security, and IRMAA effects
Estimate the timing and size of RMDs
Model multi-year conversion strategies
Analyze impacts on estate planning and legacy goals

This type of analysis is best done with planning tools or with a fiduciary who runs these scenarios as part of a comprehensive plan.

What Many Advisers Miss

Conversions cannot fix every retirement issue. They are just one lever in a broader strategy that includes:

Timing Social Security benefits can affect your conversion strategy.
Managing RMDs intelligently
Balancing taxable, tax-deferred, and tax-free buckets
Integrating Roth decisions with your overall retirement income plan
If you are under 65, ACA income planning affects conversion decisions.

If you want a full set of questions to assess an advisor’s process — including how they approach tax strategies like conversions — check out our guide: Questions to Ask a Financial Advisor.

Realistic Examples (High Level)

Beneficial Scenario:
A 62-year-old retiree with moderate income converts modest amounts each year in the gap years between retirement and starting RMDs. This reduces future RMDs and grows tax-free assets.

Less Beneficial Scenario:
A 68-year-old with significant Social Security income and Medicare IRMAA thresholds may pay more in tax and premiums in the year of conversion, reducing the net benefit.

Each situation is unique and should be modeled specifically.

How We Approach Roth Conversions

We integrate Roth conversion planning into your overall retirement income strategy. That means:

Understanding your tax situation
Considering Medicare and Social Security timing
Coordinating with cash flow needs
Evaluating impacts on estate planning

We work with clients nationwide and can help you explore whether conversion strategies fit your financial goals. Roth conversions can materially improve long-term outcomes when coordinated with withdrawal strategy and cash-flow needs as part of thoughtful retirement income planning.

If this topic feels important to your retirement plan, you might also be interested in our Who We Help page to see if our approach aligns with your needs: Who We Help: Retirement Planning for Retirees and Pre-Retirees Nationwide.

This topic is often part of a broader retirement or tax planning conversation. If you’d like help applying these ideas to your own situation, you can request an introductory conversation here.

Frequently Asked Questions

Should I convert to a Roth IRA after age 60?

Roth conversions after age 60 can make sense when your current tax rate is the same or lower than your expected future tax rate, but the decision depends on Social Security timing, Medicare IRMAA, and your overall retirement income plan.

Will a Roth conversion increase my Medicare premiums?

Yes. Large conversions increase your adjusted gross income (AGI), which may trigger higher Medicare Part B and D premiums under IRMAA rules.

Related Retirement Income Topics
– Retirement Income Planning
– Guardrails Withdrawal Strategy
– Social Security: It Pays to Wait
– Required Minimum Distributions
– What Is a MYGA?

Tax Strategies Under the OBBBA

Posted On August 11, 2025 By Scott Stratton, CFP(R), CFA In Tax Strategies /

The One Big Beautiful Bill Act (OBBBA) — signed into law in 2025 — made several significant changes to the U.S. tax code that create new planning opportunities for investors and retirees. While much of the legislation continues provisions from the 2017 Tax Cuts and Jobs Act, OBBBA also introduces new deductions and alters key rules that can impact how you manage income, donations, and deductions in retirement.

In this article, we focus on practical planning strategies for individual taxpayers, especially those preparing for or living in retirement, and how to think about these changes in the context of broader tax and retirement planning.

What the OBBBA Changed for Individual Taxpayers

The OBBBA made a number of tax changes that affect how retirees and near-retirees should approach income, deductions, and planning. These changes include:

Higher Standard Deduction (Permanent through 2026)

The standard deduction has been increased and is indexed for inflation. For many taxpayers, this change reduces taxable income without requiring itemizing.

Expanded SALT Deduction Cap

The deduction for state and local taxes (SALT) increased from the prior $10,000 cap to $40,000 for taxpayers who itemize. High-tax state residents — such as those in California, New York, or New Jersey — may benefit if they have enough deductions to exceed the standard deduction.

New Charitable Deduction Rules

Starting in 2026:

You can deduct up to $1,000 (single) or $2,000 (married filing jointly) of cash charitable contributions above the line without itemizing.

Itemized deductions for charitable cash gifts above these amounts are subject to a new floor based on a percentage of Adjusted Gross Income (AGI). Qualified Charitable Distributions (QCDs) from IRAs age 70½+ remain unchanged and continue to count toward RMDs while excluding the amount from taxable income.

Key Planning Opportunities Under OBBBA

1. Evaluate Itemizing vs. Standard Deduction

The expanded SALT cap and higher standard deduction mean that retirees should regularly reassess whether bunching deductions makes sense.

Example strategy:
If you usually take the standard deduction, you might:

“Bunch” two years of property tax payments plus charitable donations into one year to exceed the standard deduction, then take the standard deduction the next year.
This technique can boost deductions when combined with the higher SALT cap, especially if you have substantial state tax and mortgage interest.

This works well with broader planning, including charitable giving strategies and Qualified Charitable Distributions (QCDs) when you reach age 70 1/2 (see How to Reduce IRMAA and 9 Ways to Manage Capital Gains).

2. Leverage Above-the-Line Charitable Cash Deductions

For 2026 and beyond, you can deduct a modest amount of cash donations without itemizing.

Up to $1,000 (single)
$2,000 (married filing jointly)

Planning tip:
If your cash contributions would otherwise be below your total standard deduction, timing donations to maximize this deduction can improve your tax efficiency.

Note that donations of appreciated securities may still be more advantageous for reducing capital gains elsewhere — consider that when coordinating with 9 Ways to Manage Capital Gains and broader wealth planning.

3. Coordinate SALT Planning with Your Retirement Income

The expanded SALT deduction is a temporary windfall — it is scheduled to revert to the old $10,000 limit after tax year 2029.

This means:

If you routinely pay significant state and local taxes (property, income, etc.), consider whether timing deductions around years with higher retirement income (e.g., years you take IRA withdrawals or Roth conversions) could reduce your overall federal tax burden.

This interacts with other planning topics like:

4. Make Qualified Charitable Distributions (QCDs)

For investors age 70½ and older, QCDs remain a highly tax-efficient way to give to charity — and they continue to count toward RMDs without increasing your taxable income.

Because a QCD reduces taxable income, it can also help:

Avoid higher Medicare IRMAA surcharges
Reduce taxation of Social Security benefits
Improve tax efficiency during years of planned income spikes

For more on the income sequencing side, see:

5. Understand Credits and Deduction Expirations

Some popular tax incentives not directly part of OBBBA — such as clean energy tax credits — are expiring by the end of 2025.
If you were planning:

Solar or energy efficiency upgrades
Clean vehicle purchases for tax credits

Then 2025 may be your last year to benefit under prior rules.

While these credits may not directly impact your retirement accounts, they are part of a holistic tax plan that should be coordinated with your broader income and spending decisions.

How This Fits Into Your Retirement Tax Strategy

OBBBA changes are just one part of the evolving tax landscape for retirees. Tax planning remains about coordination, not isolated deductions. The tax code interacts with income sequencing, retirement distributions, Roth conversions, Medicare premiums, and charitable planning.

For example:

Timing larger IRA conversions during years when you can benefit from expanded SALT or senior deductions (such as a new $6,000 senior deduction) can produce real tax savings — particularly when coordinated with income years that avoid high Medicare IRMAA or Social Security taxation.
Meanwhile, beneficiaries may still benefit from step-up in basis rules on inherited assets, which affect capital gains planning (see 9 Ways to Manage Capital Gains).

Legislative changes like OBBBA reinforce the importance of ongoing tax planning for retirees, rather than reacting to tax law changes one year at a time.

Practical Action Steps for Retirees (2026)

Here are practical steps retirees and pre-retirees can take in light of the OBBBA:

Revisit your itemized vs. standard deduction strategy annually.
Evaluate the timing of charitable contributions (especially cash vs. appreciated assets).
Coordinate SALT planning with other income events like Roth conversions.
Continue using QCDs once eligible.
Complete any energy or credit-related projects before scheduled expirations.
Work income planning into RMD and Social Security timing decisions.

These should all fit into a broader tax planning framework rather than being treated as one-off tactics.

How a Fiduciary Advisor Can Help

OBBBA tax changes add complexity — and opportunity — but they also interact with many other retirement planning domains. A fiduciary advisor helps by:

Modeling tax outcomes over multiple years
Coordinating deductions, timing, and distributions
Integrating charitable and income planning
Reducing the risk of unintended consequences on Medicare or Social Security taxes

You don’t need to execute all strategies yourself — but knowing which ones matter for your situation can preserve more of your wealth.

Frequently Asked Questions

What is the expanded SALT deduction under OBBBA?
Under OBBBA, the SALT deduction cap increased to $40,000 for taxpayers who itemize, though it reverts to $10,000 after 2029.

Can I still use Qualified Charitable Distributions (QCDs)?
Yes. QCDs remain a valuable way for those age 70½+ to satisfy RMDs while excluding taxable income.

What changed for charitable deductions in 2026?
OBBBA added an above-the-line deduction for up to $1,000 (single) or $2,000 (married) in cash donations without needing to itemize.

New Tax Break for Boomers

Posted On August 11, 2025 By Scott Stratton, CFP(R), CFA In Tax Strategies /

As part of the “One Big Beautiful Bill”, there is a new tax deduction for Americans over age 65. There will be a new $6,000 “Bonus” tax deduction which will be on top of your standard deduction or itemized deductions on your tax return. This will be per person, so a married couple who are both at least 65, will receive $12,000 in additional tax deductions.

Here are the new tax deduction amounts for 2025:

TAX YEAR 2025	Single	Married Filing Jointly
Standard Deduction	$15,750	$31,500
Over 65 Deduction	$2,000	$3,200
New “Bonus Deduction”	$6,000	$12,000
TOTAL	$23,750	$46,700

While the White House posted that “No Tax on Social Security is a Reality” under the OBBB, that is an exaggeration. Social Security will still be taxable, although more seniors will end up owing less taxes under the expanded tax deduction. Many retirees will owe no federal income taxes. The Bonus Deduction is not linked to Social Security and you do not have to claim SS to receive the deduction.

The Fine Print

If you itemize deductions, rather than taking the standard deduction, you are still eligible for the Bonus Deduction of $6,000 per person. So your deduction could be even higher than the deductions listed above. There are two other tax savings in the One Big Beautiful Bill:

A new deduction for interest on car loans, up to $10,000, for new vehicles made in the USA and purchased in 2025-2028. (I still hate the idea of borrowing money for a depreciating asset.)
The cap on deducting state and local taxes (SALT) has been increased from $10,000 to $40,000. This is great news for people in high tax states who itemize.

There is, however, a catch: there will be income restrictions on the $6,000 Bonus Deduction. The Deduction will be phased out if your MAGI (Modified Adjusted Gross Income) is above $75,000 single or $150,000 married. This will create planning opportunities for those over 65 to keep their taxable income under these income thresholds. Some ways we might do this include:

Avoid, reduce, or smooth IRA/401(k) distributions if you are under age 73. That’s the age RMDs start.
Withdraw from your Roth IRA if necessary, instead of your Traditional IRA.
If you are over age 73, Qualified Charitable Distributions (QCDs) from your IRA will reduce your MAGI while fulfilling your RMDs.
Avoid selling taxable stocks or funds which create capital gains. Capital Gains are included in MAGI.
Defer interest income with a fixed annuity (MYGA).
Defer your Social Security benefits until age 70.

Tax efficiency remains a core focus of our financial planning work for clients. As tax regulations change, we will find new ways to help manage your tax liabilities.

The Bad News

The new Bonus Deduction of $6,000 is not permanent – it will expire after 2028. It is not an accident that the expiration will be in the election year. The Republicans will take credit for the tax savings and promise to extend the deduction if they stay in control. And if they lose and the deduction goes away, they can claim Democrats took away your tax deductions. It is a brilliant move politically, although also manipulative and a way to bribe voters. Both sides do this, but this feels quite slimy to me.

The tax cuts in this tax bill will increase the deficit by an estimated $3 trillion over the next decade. We are giving a tax cut to grandparents which will have to be paid for by their grandchildren. Just because this is popular doesn’t mean it is a smart policy for the country, long-term. Our growing debt will have many side effects:

Interest on the debt is now the largest item in the US budget, surpassing defense spending in 2024.
Debt will crowd out investment in growth, leading to higher inflation, a weaker economy, and eventually undermining market confidence.
We will be worse prepared to address the failure of Social Security payments in 2033.
Deficit spending will rise to 7% of GDP by 2026. If we have to borrow 7% to achieve a GDP growth rate of 3%, we do not have a healthy economy.

Final Thoughts

I am in favor of lower taxes and anything which helps my clients keep more of their money. My job is to help investors grow and preserve their wealth which includes using every possible tax advantage we can find. I am passionate about this work and it makes a direct impact on people’s lives.

I am pleased to see the Child Tax Credit continued under the bill and increased from $2,000 to $2,200. Other than that, however, the Bill serves to transfer wealth from the young to the old, which will further widen the income and wealth disparities in our country.

It is disappointing that neither party wants to address the long-term issues of our debt and underfunded entitlement programs. I’d like to see tax cuts linked to corresponding savings in government spending. At some point, we have to figure out how to reduce deficits, manage the debt, and fix our broken Social Security and Medicare systems. Unfortunately, the Big Bill doesn’t look very beautiful for tackling any of those problems. Washington today cannot look any further out than the next election and that’s why we keep making short-sighted choices.

In 1957, John F Kennedy won the Pulitzer Prize for his book, Profiles in Courage. He wrote about eight Senators who had the political courage to make unpopular choices in the long-term interests of the country. Kennedy noted that politicians face the challenge of three pressures: to be liked (to do what is popular), to get re-elected, and the pressure of special interest groups. That remains true today. I wish more of our current politicians would give the American people the same credit as Kennedy did: “the people will not condemn those whose devotion to principle leads them to unpopular courses, but will reward courage, respect honor and ultimately recognize right.”

Taxes Living Abroad

Posted On November 17, 2023 By Scott Stratton, CFP(R), CFA In Financial Planning, Tax Strategies /

Since we moved to Paris in February, we’ve become much more familiar with taxes living abroad. This may be of interest to anyone who is thinking of living or retiring to another country. I will share the situation for me as a US citizen living in France, but the basics will apply to most countries.

If you thought US taxes were complex, things get really difficult when you add in a foreign tax system and then have to figure out how they will interact together. Given this complexity, this article should be considered just a primer on basic terms and not used as individual tax advice. You need a tax professional who has experience with US clients living abroad.

In general, US citizens have to pay US income taxes on their global income, regardless of where you live. You don’t get out of US taxes by going abroad. But you may be able to reduce your US taxes and that is what we will discuss. Also, there are many other tax considerations besides the annual income tax bill to understand.

Tax Residency

If you spend more than one-half of the year in France (183 days), they will likely consider you a Tax Resident of France. This makes you subject to full France income taxes, which is levied on your global income. If you live in France less than half the year and are not a tax resident, you would still be subject to France taxes on any French derived income.

If all your income sources are from the US, you could potentially live abroad for just under half of the year and not become a Tax Resident. And then you would only have to file US taxes. Currently, as a US tourist, you can stay in the European Union for up to 90 days out of the rolling previous 180 days. Make sure you fully understand the “rolling 180 days” part – it is not based on a calendar year. If you can stay a tourist and not become a tax resident, this will make your life much simpler!

Avoiding Double Taxation

For a US citizen living abroad, you have the problem of double taxation. Your income will be taxed by your resident country and then it will be taxed again by the US. Thankfully, there are tax treaties with 70 countries which provide some benefit and there are several ways to reduce or eliminate the double taxation. Still, you will need to file a US tax return even if you don’t end up owing any US taxes.

Foreign Earned Income Exclusion

The US tax code allows for a citizen to exclude up to $120,000 (2023) in Foreign Earned Income from being taxable on your US taxes. This is doubled to $240,000 for couples who are married filing jointly and who both have foreign wages. You must live abroad for 330 out of the past 365 days. For someone whose income is below the FEIE threshold, you could end up with zero taxable income for the US. You would calculate this exclusion on IRS form 2555 “Foreign Earned Income”.

The FEIE does not apply to any US wages or to any US capital gains, dividends, interest, rent, or other US sourced income. So if you have US wages or income, those earnings are still taxable outside of the FEIE amounts.

In addition to the FEIE, there is also a US tax exclusion for foreign housing expenses, which has a cap of 30% of the FEIE, or $36,000 for 2023. If you reduce your US taxable income to zero through the FEIE and/or housing exclusion, please note that you will be ineligible to make any IRA contributions. (Because your taxable income is zero.)

Foreign Tax Credit

Alternatively, you may be able to claim a credit on your US tax return for foreign taxes paid. The FEIE may take many people’s taxable income to zero and you can stop right there. However, US citizens who make more than the FEIE thresholds, or who have some US-sourced income, may still owe US taxes. And in those situations, applying the Foreign Tax Credit may be preferable. Please note that you have to choose either the FEIE or the Foreign Tax Credit, but cannot do both.

In my situation, we will probably end up using the Foreign Tax Credit. That’s because we have both US and France sources of income (US for me and France for my wife). And since the French taxes will likely be higher than the US taxes, it may take our US tax bill to zero.

Except for one thing: although France taxes us on global income, they exclude Real Estate income. They believe that all real estate income should be taxed locally. And indeed, if you buy a rental property in France, they will charge you income tax on that property even if you never set foot in the country or become a tax resident. As a result, our AirBnb Properties in Hot Springs will remain solely taxed in the US.

One challenge with using the Foreign Tax Credit is that it requires that you finish your foreign taxes before you complete your US tax return. For many, this will require filing a US tax extension past April 15th. And once you are beyond April 15th, you have passed the window to make Traditional or Roth IRA contributions or to calculate 401(k) profit sharing amounts. You may not be able to determine your eligibility until you complete your tax return, so you might miss out on some opportunities.

Social Security

In France, the payroll tax for Social Security is 20%. That is much higher than the US contribution of 7.65% for Social Security and Medicare. However, the French contribution includes all social programs, including Health Insurance, unemployment, maternity leave, as well as “retirement” Social Security.

Although 20% is 12% more than what we would pay in the US, we don’t have any health insurance expenses in France. And so it may be fairly comparable to what we would pay in the US for total costs. As a self-employed person in the US, we might pay $1,200 a month for a family plan with a $5,000 deductible. That’s a $19,400 annual expense we don’t have in France. And the medical system here is excellent.

We just had a baby girl a month ago, and I have no complaints about the value we have received. I will say that the social charges here are a great deal if you have a modest income, but if you have a very high income, you may feel that you are paying in more than you are getting back.

Social Security Vesting

There is one problem for us, however, with social security taxes abroad. Just like the US Social Security, the French retirement system has a 10-year vesting period. Only after you have contributed for 10 years do you become eligible to receive a retirement pension. We do not plan to stay in France for 10 years, so all the money we will pay into their Social Security will not come back to us later in retirement.

Our French earnings are not credited toward the US Social Security system either. US Social Security benefits are calculated based on your highest 35 years of inflation adjusted earnings. We are effectively losing these years of contributions. We are paying in France for no future benefit, while losing the years that could have been added to the US benefits. There’s no 401(k) in France, so no other employer retirement contributions, either.

If you are considering working abroad, make sure you understand its impact on your future benefits! We have enough in ongoing savings and investments for this not to be a major problem, but it is an opportunity cost that we are missing by working outside the US.

Pitfalls Abroad

Besides wages, there are other tax events which could become major pitfalls when living abroad. Here are a few things which could become huge tax bills for US citizens in other countries.

Home capital gains. In the US, we have a $250,000 capital gains exclusion on the sale of your primary residency. France does not. If your US house sale closes a week after moving to France, it occurred while you are a tax resident of France! Maybe you have a $100,000 capital gain which is ignored in the US but now taxable in France. Sell your house before you move! Or keep it.
Gift Taxes. Large gifts to children or others are fine in the US with a lifetime Gift/Estate tax exemption of $12.92 million. Not so in France. Gift taxes could be 20% and apply with thresholds dependent on the relationship. There are even gift taxes between spouses! The French gift tax exemption is only 31,865 Euros per 15 years.
Trusts not recognized. Based on Civil, not Common Law, France does not recognize trusts for tax purposes. Don’t set up US Trusts before becoming a tax resident abroad.
Inheritance Taxes. If you are in France for more than six years, you are subject to inheritance taxes. These are paid by the recipient, unlike US Estate Taxes, which is paid by the Estate. The US threshold is $12,920,000 before any Estate taxes are due. In France, inheritance taxes start at 5% at 8072 euros, but steps up to 45% tax on amounts above 1,805,677 euros (2023).

Get Help

If you are contemplating working or retiring outside the US, taxes living abroad can be complex. Luckily, you’re not the first one to do this. You will want to have tax advisors in the US and in your new country who have experience navigating these complex rules. And having a Wealth Manager who understands the tax implications of your portfolio construction is very important, too.

When my wife’s employer offered her a position in their Paris office, it was an offer we could not refuse! It has been a remarkable opportunity. If you could have the chance to live or work overseas, I would encourage you to see if it is possible. The taxes are a headache and will take a bit more time, but I do think it will be worth it for the experience. Certainly part of achieving the Good Life is being able to fearlessly make the choices to live your life as you dream it could be!

Backdoor Roth — Still Available in 2026 (What You Should Know)

Posted On October 15, 2021 By Scott Stratton, CFP(R), CFA In Tax Strategies /

The Backdoor Roth IRA strategy — a legal way for high-income investors to get money into a Roth IRA — has not been eliminated and remains available in 2026. Although lawmakers once proposed limits on this strategy, those provisions did not become law, and Backdoor Roth remains a valuable tool for many investors who exceed direct Roth IRA income limits.

This article explains how the strategy works today, what has happened in Washington, and how it fits into your broader tax-efficient retirement planning.

What Is a Backdoor Roth IRA?

A Backdoor Roth IRA is a two-step tax planning strategy:

Contribute to a Traditional IRA with after-tax dollars (no income limit on this step)
Convert that contribution to a Roth IRA, where earnings grow tax-free and qualified withdrawals are tax-free

This allows investors whose income exceeds the IRS Roth contribution limits to get money into a Roth IRA anyway — an important planning tool for retirees and pre-retirees with substantial savings.

Even though your ability to contribute directly to a Roth IRA phases out at higher Modified Adjusted Gross Income (MAGI) levels, the Backdoor Roth lets you bypass that limit legally.

Is the Backdoor Roth Going Away?

Legislative History

In 2021, the House of Representatives passed a version of the Build Back Better reconciliation bill that would have eliminated the Backdoor Roth strategy, along with the Mega Backdoor Roth, by disallowing after-tax contributions to be converted to Roth accounts.

However:

The Build Back Better Act did not become law.
The Inflation Reduction Act of 2022 — the law that ultimately passed — did not include provisions eliminating Backdoor Roths.

So, as of 2025–2026, the Backdoor Roth strategy remains available.

What About Future Changes?

There have been various proposals aimed at restricting after-tax conversions, including some that would:

Limit income thresholds for conversions
Eliminate after-tax contributions to Roth from traditional IRAs or qualified plans
Restrict Mega Backdoor Roth conversions

None of these proposed changes have yet been enacted into law. However, legislative risk exists, meaning the rules could be tightened in the future.

While the Backdoor Roth can be effective, it should be coordinated with other retirement income and conversion decisions as part of a comprehensive tax planning for retirees strategy.

Why It Still Matters for Your Retirement Plan

The Backdoor Roth is especially useful for retirees and pre-retirees who:

Have income too high for direct Roth contributions
Expect to be in a higher tax bracket later in retirement
Want to reduce Required Minimum Distributions (RMDs) and long-term taxes
Are coordinating income-sensitive planning such as Roth conversions around Social Security timing and Medicare IRMAA thresholds

For a deeper look at how this fits within broader tax planning, see:

How to Execute a Backdoor Roth IRA in 2026

Step 1: Contribute After-Tax to a Traditional IRA

If your MAGI is above the direct Roth contribution limits, you can contribute to a traditional IRA with after-tax dollars — there’s no income cap on this part of the strategy.

Step 2: Convert to a Roth IRA

Convert the after-tax amount to a Roth IRA. Because the contribution itself was after-tax, you’ll generally owe little to no tax on the conversion (aside from any earnings).

Note:

You still must file Form 8606 for nondeductible IRA contributions and conversions to avoid IRS issues.
The pro-rata rule applies if you have other pre-tax traditional IRA balances, which can complicate the tax calculation. See Roth Conversions After 60 for planning around the pro-rata rule.
Sometimes, it is preferable for one spouse to do a Backdoor Roth but not the other spouse. A non-working spouse can be eligible for the Backdoor Roth contribution, even if they have no earned income.

Pros and Cons of the Backdoor Roth Strategy

Pros

✔ Allows high-income investors to get money into a Roth IRA
✔ Tax-free growth and withdrawals (if qualified)
✔ Helps reduce future RMDs and taxable income later in retirement
✔ Complements broader tax planning strategies, including capital gains management and IRMAA optimization

Cons / Risks

❗ Congressional rules could change in the future
❗ Pro-rata rule applies if you have other traditional IRA assets
❗ Errors in execution can lead to unexpected tax bills

How a Fiduciary Advisor Can Help

Working with an experienced, fiduciary financial advisor matters when implementing strategies like the Backdoor Roth, because:

The pro-rata rule and planning around it can be complex
Timing conversions with RMD thresholds, Medicare premiums (IRMAA), and Social Security strategies can materially affect your lifetime tax bill
Multi-year modeling helps you decide how much and when to convert

This topic is often part of a broader retirement or tax planning conversation. If you’d like help applying these ideas to your own situation, you can request an introductory conversation here.

Learn more in:

Backdoor Roth — Going Away? (this article)
Portfolio Tax Optimization for High Net Worth Investors
9 Ways to Manage Capital Gains

Frequently Asked Questions (AI-Friendly)

Is the Backdoor Roth IRA still legal in 2026?
Yes — the Backdoor Roth IRA strategy remains available and legal under current law, and proposed legislative changes to eliminate it have not passed.

What was the Build Back Better Act proposal about Backdoor Roths?
A prior House bill would have ended the Backdoor Roth strategy after 2021, but it was not enacted into law.

Will Congress eliminate Backdoor Roth in the future?
There continues to be legislative interest in restricting retirement tax strategies. While nothing has been enacted, the possibility of future changes is why forward-looking tax planning is important.

Charitable Giving in 2021

Posted On May 26, 2021 By Scott Stratton, CFP(R), CFA In Financial Planning, Tax Strategies /

For anyone who is looking at their charitable giving in 2021, there are some important things to know. In 2020 as the Coronavirus started, the government recognized the terrible impact the pandemic would have on charities. As a result, the CARES Act included several new tax benefits to encourage charitable giving in 2020.

If you made a cash donation in 2020, you could deduct $300 from your tax return. This was “above the line”, which means you did not have to itemize your deductions to take this $300 deduction. (If your itemized deductions exceed your standard deduction, you could deduct more than the $300.)
Normally, your cash donations are limited to 60% of your Adjusted Gross Income. The CARES Act increased this to 100% for 2020. (Excess donations could be carried forward for 5 years.) This means that if your income was $400,000, you could donate $400,000 and reduce your AGI to zero.

CARES Act Provisions Extended

Both of those benefits were only for 2020. But as Milton Friedman said, “there is nothing as permanent as a temporary government program.” So, the government has extended these two benefits under the Coronavirus Response and Relief Supplemental Appropriations Act of 2021.

For 2021, you can still deduct $300 for cash donations as an above the line deduction. Unlike 2020, this is per spouse, so a married couple filing jointly can deduct $600 in 2021. And the 100% of AGI limit is also extended through December 31, 2021. Note that these apply only to “cash” donations and not to donations of stocks or goods. The limit for donating stocks remains 30% of AGI.

I do have to question whether you really would want to deduct 100% of AGI and take your taxable income to zero for one year. Let’s say you have $400,000 in annual taxable income, want to donate $400,000, and are married. Consider these two simplified scenarios. I’m using the 2021 tax rates for both years (we don’t know yet the exact income levels for 2022.)

You donate $400,000 in year one. Your taxes are zero. The next year, your income is back to $400,000. In year 2, you would owe $84,042 in Federal Income Taxes.
You donate $200,000 in years one and two. In both years, your remaining taxable income is $200,000. You would owe $36,042 in each year, for a total of $72,084 over two years. So, you actually would save $12,000 in taxes by spreading out your donations over two years, rather than doing 100% in one year. That’s because with a graduated tax system, taking your taxes to zero isn’t necessary. You pay only 12% on taxes up to $81,050.

Charitable Strategies for 2021

If you do want to make a large donation, consider pairing it with a Roth Conversion. The donation could take your AGI to zero, and then you can choose how much of your IRA/401(k) you want to convert and pay those taxes today. Then, your Roth is growing tax-free.
For many individuals or couples, the $300/$600 donation fully covers their charitable giving in 2021. Make sure you keep your receipts and donation letters! Most donors do not have enough deductions to itemize.
You can still donate your appreciated securities and save on capital gains tax. Do this if your donations will remain under the 30% of AGI threshold. Even if you are only taking the standard deduction, at least you will avoid capital gains. If you itemize and exceed the 30% threshold, you can carry forward your donations for five years.
Pack your donations into one year and establish a Donor Advised Fund (DAF). You get the upfront tax deduction and can then distribute money to charities in the years ahead. This is a good strategy if you are having a year with very high income, such as from selling a business or large asset.
If, on the other hand, you anticipate that your tax rate will be going up, spread out your donations or hold off to future years. This could be due to your income going up, tax increases from Washington on the wealthy, or the sunset of current tax rates after 2025.
If you are over age 70 1/2, you can give from your IRA tax-free. If you are 72, this counts towards your RMD. While the CARES Act eliminated RMDs for 2020, they are back for 2021. You can make a Qualified Charitable Donation (QCD) of up to $100,000 a year from your IRA.

Tax Smart Giving

No one gives to charity just for the tax benefits. We have causes and organizations we want to support. Giving back is a way of showing gratitude for our success, helping others, and being a positive contributor to making the world a better place. When we have an Abundance mindset, giving with purpose is a joy. Still, if we can be smart about our charitable giving in 2021, there can be significant tax savings. That could mean not only lower taxes for you, but ultimately, more money can go to charities in the years ahead.

Since our founding in 2014, Good Life Wealth Management has donated 10% of profits to charity each year. Additionally, we offer a Matching Gift Program to our clients each fall, in which we match $200 of donations to their favorite charity.

Strategies if the Step-Up in Basis is Eliminated

Posted On March 31, 2021 By Scott Stratton, CFP(R), CFA In Tax Strategies / 1

Today, we look at strategies if the step-up is basis in eliminated for estate planning. There were two new proposals in the Senate this week which will target inherited wealth. These two Acts, if passed, would completely change Estate Planning for many families. The two Acts are called the STEP Act and the 99.5% Act.

The STEP Act

The STEP Act (Sensible Taxation and Equity Promotion Act), proposed by Senators Booker, Sanders, Warren, Whitehouse, and Van Hook would eliminate the Step-Up in Cost Basis. A Step-Up in Basis means that upon Death, an asset has its cost basis reset to the date of death. This allows the heirs to immediately sell an asset and receive the funds without owing any taxes. Or, if they choose to hold on to the asset, they will only owe tax on the capital gains from the date of death forward. Otherwise, they would owe taxes based on their parent’s cost basis (or other decedent).

The STEP Act proposes to eliminate the Step Up in Basis, retroactively to January 1, 2021. In its place, the Act would allow a one-time exclusion of up to $1 million of inherited capital gains. It also allows the tax to be paid over 15 years if it is an illiquid asset like a farm or business. Many older parents have held on to assets, such as mutual funds or real estate, specifically to get a step-up in basis for their children. Allowing for the exclusion of $1 million in capital gains at death will help most families. But include real estate, and many families will have over $1 million in unrealized capital gains. And those families will now be paying a capital gains tax.

The 99.5% Act

The 99.5% Act, proposed by Senator Sanders, will increase the Estate Tax paid by many families. Currently, the Estate Tax Exemption is $11.7 million ($23.4 million for a couple), which has effectively eliminated the Estate Tax for Middle Class Families. Previously, the Estate Tax Exemption was $1 million, as recently as 2003. My clients have welcomed the increase of the Estate Tax Exclusion over the past 17 years. The 99.5% Act includes provisions to:

Reduce the Estate Exemption from $11.7 million to $3.5 million.
Reduce the Unified Gift Exemption from $11.7 million to $1 million per lifetime.
Raise the Estate Tax Rate to a range of 45-65%.
Reduce the Annual Gift Tax Exclusion from $15,000 to $10,000 per donee, AND impose an annual limit of $20,000 per donor.
Reduce certain tax benefits of Trusts, Generation Skipping Trusts, etc.

While I don’t cater to the ultra-wealthy, I do have a number of Middle Class families who this will impact. Ideas in Washington often stick around until they become reality. So, if these Acts don’t get passed now, don’t think that we will never hear them again. I don’t think there will be much empathy for families who have over $1 million in unrealized capital gains. However, in some cases, children will need to sell the houses, farms, and businesses they inherit to pay for these new taxes.

How Many Taxes?

Just to be clear, the Estate Tax is in addition to any Income Tax or Capital Gains Tax. Under the two proposals, an individual who dies with $5 million, would owe a 45% Estate tax on $1.5 million (the amount above $3.5 million). That’s a $675,000 Estate Tax Bill. Then, if their cost basis was $1 million and the unrealized capital gain was $4 million, the heirs would owe another 23.8% on $3 million of capital gains. That would be another $714,000 in taxes, for a total of $1,389,000. Presently, that tax would be zero, so we are talking about a huge increase. Let’s consider eight strategies if the step-up in basis is eliminated and other changes enacted.

Ways to Reduce Taxes under STEP and 99.5% Acts

1. If the Step-Up in Basis is eliminated, you may want to pay your capital gains gradually. Aim to keep your total unrealized gains under $1 million. For example, if you have $2 million in gains, perhaps you could harvest $100,000 of gains for the next 10 years. The goal is for you to pay the gains gradually at the 15% rate and save your heirs from being taxed at the 23.8% rate.

There is a separate proposal from Biden to increase the long-term capital gains rate for taxpayers in the highest tax bracket to 39.6%. Plus you would be subject to the 3.8% Medicare Surtax and state income taxes. And then, capital gains will be taxed at 43.4% to well over 50% in many states. The government would take more than half of your gains! If that happens, it will be vitally important to harvest gains regularly to avoid pushing your heirs into the top bracket.

Roth IRAs

2. Keep your high growth investments in a Roth IRA. Beneficiaries inherit a Roth IRA income tax-free. The Roth 401(k) looks better every year, versus a tax-deferred Traditional 401(k). If higher taxes are ahead, it may be preferable to use the Roth 401(k).

3. Gradually convert your Traditional IRAs to a Roth. By pre-paying the taxes today, you can both shrink the size of your taxable estate and reduce the Income tax burden on your heirs. The current tax rates will expire after 2025. The next five years is a good window to make Roth conversions.

Plan Your Giving

4. Give away your full Annual Gift Tax Exclusion every year. Reduce your Estate. Please note that the direct payment of someone’s medical or education bills does not count towards the annual exclusion. Do not reimburse your children for those expenses – make the payment directly to the doctor, college, etc.

5. If you make charitable donations, give away your most highly appreciated securities, rather than cash. This will reduce your taxable gains. If you do want to leave money to charity, make a charity a beneficiary of your Traditional IRA. If you are over age 70 1/2, you can make charitable donations of up to $100,000 a year from your IRA as Qualified Charitable Donations, or QCDs. QCDs can reduce your taxes so you have more budget to harvest capital gains from taxable accounts. You do not have to itemize to deduct QCDs.

Other Estate Tax Savings

6. Sell your primary residence. A couple, while alive, can exclude $500,000 in capital gains on the sale of their primary residence, as long as they lived there at least 2 of the past 5 years. ($250,000 for single filers.) Let your kids inherit the house and that capital gains exclusion may be lost. Better to sell it yourself and buy another house where you don’t have the big capital gains.

7. Maximize your contributions to 529 College Savings Plans for your children or grandchildren. These will pass outside of your taxable estate and will grow tax-free for the beneficiaries. 529 Plans will not be taxable under any of these proposals, and will become a more important estate planning tool.

8. Life Insurance proceeds are not subject to income tax to the beneficiary. Additionally, If we establish your insurance policy with an Irrevocable Life Insurance Trust (ILIT) as the owner, the life insurance will pass outside of your Estate and not be subject to the Estate Tax. This didn’t matter as much when the Estate Exemption was $11.7 million. ILITs will benefit a lot more families if the Estate Exemption is reduced to $3.5 million. Include the tax benefits, and Permanent Life Insurance looks even better as an asset.

Higher Taxes Ahead?

I am proud to be an American and pay my fair share of taxes. Still, these proposals represent a massive tax increase on a lot of families. Many professional couples have the potential to have over $3.5 million before they pass away, and easily over $1 million in capital gains, too. We will keep you posted on this legislation. It seems likely that the two Acts will be merged and some compromise reached before a final version is up for a vote.

Luckily, there is a lot we can do to offset some of these proposed taxes and reduce the burden on your Estate and Heirs. Last minute strategies won’t work here, though. Families need to be thinking about their transfer of wealth years and decades ahead of time. Have questions on strategies if the step-up in basis is eliminated? Feel free to drop me an email.

Tax Strategies Under Biden

Posted On October 2, 2020 By Scott Stratton, CFP(R), CFA In Tax Strategies /

With the Presidential election next month, investors may be wondering about what might happen to their taxes if Joe Biden were to win. Let’s take a look at his tax plan and discuss strategies which may make sense for high income investors to consider. I am sharing this now because we might consider steps to take before year end, which is a short window of time.

Let’s start with a few caveats. I am not endorsing one candidate or the other. I am not predicting Biden will win, nor am I bashing his proposals. This is not a political newsletter. Even if he is elected, it is uncertain that he will be able to enact any of these proposals and get them passed through the Senate. The discussion below is purely hypothetical at this point.

My job as a financial planner is to educate and advise my clients to navigate tax laws for their maximum legal benefit. I create value which can can save many thousands of dollars. Some of Biden’s proposals have the potential to raise taxes significantly on certain investors. If he does win, we may want to take steps before December 31, if we think his proposals could be enacted in 2021. I would do nothing now. I expect no significant changes under a continued Trump administration, but I will also be looking for tax strategies for that scenario.

Other Biden proposals will lower taxes for many people. For example, he proposes a $15,000 tax credit for first-time home buyers. I am largely ignoring the beneficial parts of his tax plan in this article, because those likely will not require advance planning.

Tax Changes Proposed by Biden

1. Tax increases on high earners. Biden proposes to increase the top tax rate from 37% back to 39.6%. He would eliminate the Qualified Business Income (QBI) Deduction, which would penalize most self-employed business owners. He would limit the value of itemized deductions to a 28% benefit. For those with incomes over $1 million, he proposes to increase the long-term capital gains and qualified dividend rate to the ordinary income rate, an increase from 20% to 39.6%, plus the 3.8% Medicare surtax. He proposes to add 12.4% in Social Security payroll taxes on income over $400,000.

Strategies:

Accelerate earnings, capital gains, and Roth Conversions into 2020 to take advantage of current rates.
Accelerate tax deductions into 2020, such as charitable donations or property taxes. Establish a Donor Advised Fund in 2020.
Increase use of tax-free municipal bonds, and use ETFs for lower taxable distributions. Shift dividend strategies into retirement accounts.
Use Annuities for tax deferral if you anticipate being in a lower bracket in retirement.

2. 26% retirement contribution benefit. Presently, your 401(k) contribution is pre-tax, so the tax benefit of a $10,000 contribution depends on your tax bracket. If you are in the 12% bracket, you would save $1,200 on your federal income taxes. If you’re in the 37% bracket, you’d save $3,700. Biden wants to replace tax deductibility with a flat 26% tax credit for everyone. On a $10,000 contribution to a 401(k), everyone would get the same $2,600 tax credit (reduction). This should incentivize lower income folks to put more into their retirement accounts, because their tax savings would go up, if they are in the 24% or lower bracket. For higher earners, however, this proposal is problematic. What if you only get a 26% benefit today, but will be in the 35% bracket in retirement? That would make a 401(k) contribution a guaranteed loss.

Strategies:

High Earners may prefer the Roth 401(k) option if the current deduction is reduced on the Traditional IRA. Read more: The Secret Way to Contribute to a Roth IRA

3. End the step-up in cost basis on inherited assets. Currently, when you inherit a house or a stock, the cost basis is reset to its value as of the date of death. Under Biden’s plan, the original cost basis will carry over upon inheritance.

Strategies:

If parents are in a lower tax bracket than their heirs, they may want to harvest long-term capital gains to prepay those taxes.
Life Insurance would become more valuable as death benefits are tax-free. Or Life Insurance proceeds could be used to pay the taxes that would eventually be due on an inherited business or asset. Read more: The Rate of Return of Life Insurance.

4. Cut the Estate Tax Exemption in half. Presently, the Estate/Gift Tax only applies on Estates over $11.58 million (2020). Biden wants to cut this in half to $5.79 million (per spouse).

Strategies:

If your Estate will be over $5.79 million, you may want to gift the maximum amount possible in 2020. Alternatively, strategies such as a Trust could be used to reduce estate taxes. (For example, the Intentionally Defective Grantor Trust (IDGT) or Grantor Retained Annuity Trust (GRAT).)
Be sure to use all of your annual gift tax exclusion, presently $15,000 per person.
Establish 529 Plans, which will be excluded from your estate.
Shift Life Insurance out of your Estate, using an Irrevocable Life Insurance Trust (ILIT).

While we don’t know the outcome of the election, there could be valuable tax strategies under Biden. We will continue to analyze economic proposals from both candidates to develop planning strategies for our clients. When there are significant changes in tax laws, we want to be ahead of the curve to take advantage wherever possible.

CARES Act RMD Relief for 2020

Posted On March 30, 2020 By Scott Stratton, CFP(R), CFA In College Savings, Financial Planning, Tax Strategies /

The Coronavirus Aid, Relief, and Economic Security CARES Act approved this weekend eliminates Required Minimum Distributions from retirement accounts for 2020. If you have an inherited IRA, also known as a Stretch or Beneficiary IRA, there is also no RMD for this year. We are going dive into ideas from the CARES Act RMD changes and also look at its impact on charitable giving rules.

Of course, you can still take any distribution that you want from your retirement account and pay the usual taxes. Additionally, people who take a premature distribution from their IRA this year will not have to pay a 10% penalty. And they will be able to spread that income over three years.

RMDs for 2020

Many of my clients have already begun taking their RMDs for 2020. (No one would have anticipated the RMD requirement would be waived!) Can you reverse a distribution that already occurred? Not always. However, using the 60-day rollover rule, you can put back any IRA distribution within 60 days.

If you had taxes withheld, we cannot get those back from the IRS until next year. However, you can put back the full amount of your original distribution using your cash and undo the taxable distribution. You can only do one 60-day rollover per year.

For distributions in February and March, we still have time to put those distributions back if you don’t need them. Be sure to also cancel any upcoming automatic distributions if you do not need them for 2020.

If you are in a low tax bracket this year, it may still make sense to take the distribution. Especially if you think you might be in a higher tax bracket in future years. An intriguing option this year is to do a Roth Conversion instead of the RMD. With no RMD, and stocks down in value, it seems like a ideal year to consider a Conversion. Once in the Roth, the money will grow tax-free, reducing your future RMDs from what is left in your Traditional IRA. We always prefer tax-free to tax-deferred.

Charitable Giving under the CARES Act

Congress also thought about how to help charities this year. Although RMDs are waived for 2020, you can still do Qualified Charitable Distributions (QCDs) from your IRA. And for everyone who does not itemize in 2020: You can take up to $300 as an above-the-line deduction for a charitable contribution.

Also part of the CARES Act: the 50% limit on cash contributions is suspended for 2020. This means you could donate up to 100% of your income for the year. This is a great opportunity to establish a Donor Advised Fund, if significant charitable giving is a goal.

Above the $300 amount, most people don’t have enough itemized deductions to get a tax benefit from their donations. Do a QCD. The QCD lets you make donations with pre-tax money. Of course, you could do zero charitable donations in 2020 and then resume in 2021 when the QCD will count towards your next RMD. But I’m sure your charities have great needs for 2020 and are hoping you don’t skip this year.

The Government was willing to forgo RMDs this year to help investors who are suffering large drops in their accounts. To have to sell now and take a distribution is painful. However, if you already took a distribution, you are not required to spend it. You can invest that money right back into a taxable account. In a taxable account, the future growth could receive long-term capital gains status versus ordinary income in an IRA. I’ll be reaching out to my clients this week to explain the 2020 CARES Act RMD rules. Feel free to email me if you’d like our help.