Midyear IRA Planning Opportunities To Consider

Tax return season is over, but there are tax-saving opportunities to consider between now and the end of the year. Here are a few IRA strategies to review and consider.

Qualified charitable distributions (QCDs). If you’re over age 70½, have a traditional IRA, and make charitable contributions, you probably should be making those charitable contributions using QCDs.

You direct the IRA custodian to make a distribution to a charity. The distribution isn’t included in your gross income, but it counts toward your required minimum distribution (RMD) for the year, if you have one.

Conversions to Roth IRAs. I explained in some detail in this post why many people should consider reducing their traditional IRAs and 401(k)s in the next few years. A good way to do this is to convert all or part of a traditional IRA into a Roth IRA. Review the post to determine if a conversion or another strategy is a good idea for you.

Backdoor Roth conversions. Some people want to make contributions to Roth IRAs. But because their incomes are too high they aren’t eligible to make Roth IRA contributions. They are eligible to make nondeductible contributions to traditional IRAs.

For them, a good alternative strategy is to make a nondeductible contribution to a traditional IRA and then convert that amount to a Roth IRA. Remember IRA contributions now are allowed at any age, but you must have earned income at least equal to the amount of the contribution.

You probably will owe taxes on the conversion unless you had no previous traditional IRA balance or had a basis in the IRA (meaning you made after-tax contributions in the past).

Required minimum distributions. Don’t forget to take RMDs before the end of the year. You can take an RMD in property instead of selling an investment and distributing cash.

People who inherited IRAs after 2019 generally need to take RMDs and have to empty the IRAs within 10 years. The rules vary depending on whether the original IRA owner was taking RMDs at the time of death. The rules also vary for different types of beneficiaries. For details, review this post and this one.

Review beneficiary designations. The beneficiary designation on file with the IRA custodian determines who will inherit the IRA. If it’s been a while since you looked at the designation or there’s been a major change in your family, it’s time to review the designation.

If a trust is the beneficiary, have an estate planner review the situation. The SECURE Act in 2019 changed the rules for trusts that are IRA beneficiaries. You might want to change the designation.