By Sarah Brenner, JD
Director of Retirement Education
A new year brings a fresh start, and after 2020, we need that more than ever. You probably have a few resolutions for 2021. When making your list of goals for the new year, don’t overlook your IRA. Here are a few suggestions for your IRA for 2021.
1. Act sooner, rather than later. Thinking about making an IRA contribution? You have until the tax-filing deadline, including extensions, to get it done. This means you can still make your 2020 IRA contribution anytime until April 15, 2021. But why wait until the last minute? Get it done sooner. By doing so, you will not only avoid last-minute problems but also allow your IRA to grow faster. While you’re at it, why not consider making your contribution for 2021 at the same time? Making your contributions early can produce a surprising difference in the amount you will have saved in your IRA when you retire.
RMDs were waived for 2020, but they are back for 2021. If you are required to take an RMD for 2021, why not apply the same “get it done” philosophy? While some rare individuals may have valid reasons for delaying their RMD until the last minute, it usually makes sense not to wait that long. A missed RMD can result in a 50% penalty. You don’t want to mess around here. Get that RMD out sooner rather than later.
2. Consult an expert about a conversion. Anyone with a traditional IRA can convert that IRA to a Roth IRA. Does that mean everybody should? No, but it is worth at least going through an analysis each year to decide whether a conversion is right for you. Your tax situation may be different from year to year. A conversion that did not make sense last year might in 2021. This may be the year that the trade-off of paying taxes now for future tax-free Roth IRA earnings is worthwhile.
You have worked hard to save money in your IRA. A conversion is a big step, and recent tax law changes have made every conversion permanent. Consider consulting a financial or tax professional to help you decide whether a conversion is the right step.
3. Move your money the right way. Not happy with your current IRA investments? Changing investments may make sense but if 2021 is your year to move on, be sure to make your move the right way. Go with a trustee-to-trustee transfer and have your IRA funds move directly if you are choosing new investments with a new IRA custodian. Avoid having the funds paid to you. Direct transfers between IRAs avoid lots of hassles like the 60-day rollover rule and the once-per year rollover rule.
4. Revisit your IRA beneficiary designation. There is one form that you can use to control the fate of your IRA after your death. That is the IRA beneficiary designation form. If you want to ensure your hard-earned retirement savings end up in the right hands down the road, make sure this form is up-to-date and safely in the hands of the IRA custodian. Recent law changes such as the SECURE Act, as well as life events, may mean your beneficiary form is out of date. Spend some time in 2021 checking this form to be certain it accurately reflects your current wishes.
5. Take advantage of QCDs and other IRA tax breaks. IRA rules can be complicated. Be sure you are not missing out on important benefits by becoming informed of what options are out there. Are you over age 70 ½ and charitably inclined? You may want to consider a Qualified Charitable Distribution (QCD). Have you thought about a Qualifying Longevity Annuity Contract (QLAC)? Are you looking to use funds in your IRA to purchase your first home? In 2021, make a plan to learn more about what you can do with your IRA.
6. Expect the Unexpected. The tax rules, including the IRA rules, are always changing. Every year brings new twists, but 2021 is likely to bring more change than usual. IRS guidance on recent rule changes and a new administration and Congress could have a big impact on your IRA. Stay tuned for the changes ahead.