While the end of the year typically consists of a little portfolio housekeeping and attempts to reduce tax burdens, we can all agree that 2020 is not the typical year. This year, the Coronavirus Aid, Relief and Economic Security (CARES) Act legislation passed by Congress to help the economy rebound from the COVID-19 pandemic has created unique, one-time opportunities for investors to take advantage of before the year ends. This is coupled with an upcoming administration change, and with it, potential tax changes as well. U.S. News & World Report recently spoke with Terry Sawchuk, the founder and chairman of Sawchuk Wealth, for insight on these opportunities all investors should consider as the new year approaches.
As a result of the CARES Act, retirees are allowed to forgo taking their required minimum distributions (RMDs) from qualified plans this year. However, as Sawchuk tells the publication, just because retirees can waive them, it does not mean that they should, especially since the stock indexes have rebounded.
“The ability to skip RMDs can be very attractive,” says Sawchuk. “I actually think it’s not the year to skip RMDs. We’re really unclear as to what the future holds, but what I do know is that the tax rates are very low, and people should take advantage of that.”
Instead, for retirees considering skipping RMDs because they do not need the income, Sawchuk recommends opening a Roth individual account and investing the money there. This process allows investors to take advantage of low tax rates, which are set to expire in 2025, while also converting the capital into investments where their gains grow tax-free.
Another way for investors to take advantage of the current environment is by investing monetary gifts into life insurance policies for beneficiaries. While parents can give monetary gifts to their children of up to $15,000 a year without paying taxes, these funds can instead buy a life insurance policy, which, according to Sawchuk, has “astronomical leverage” to earn money.
“There’s almost no way you could take $15,000, invest it each year, and get anywhere near where you could get with a life insurance policy, particularly with zero risk,” he explains.