Can the Chaos of 2020 Actually Help Your Retirement?

While most of us can’t wait for the ball to drop next week, it’s an important time to reflect on what’s occurred this year from a financial planning perspective. Let’s not mince words: Economic turmoil, high unemployment, unrelenting food lines, and debilitating disease ravaged the country in 2020. We learned, however, that the stock market and the broader economy serve two different populations. As of this writing, the S&P 500 index is up nearly 15% for the year, with most other averages in the same range. In this article, we look at how those planning for or in retirement can find some solace in the silver linings of the year. 

RMDs were suspended in 2020

For savers over the age of 72 with traditional IRAs or workplace retirement plans (or for beneficiaries of any age with inherited IRAs), required minimum distributions (RMDs) were suspended in 2020. RMDs are the annual requirement for people to withdraw from their pre-tax retirement accounts and to declare that withdrawal as income in the year of distribution.

Generally speaking, RMDs increase taxable income and have the potential to push you into a higher tax bracket. We all received a reprieve this year. But don’t expect a repeat — barring last-minute legislation to the contrary, RMDs will be back in 2021.

Roth conversions were (and still are) in vogue

A Roth conversion — or the deliberate conversion of pre-tax retirement money to post-tax retirement money — was and still is a common strategy in 2020. In addition to the aforementioned RMD suspension, many people experienced a disruption in or loss of income for the year. This means that many people had a prime opportunity to declare pre-tax money as income this year and shoehorn themselves into a lower tax bracket than normal.

For example, let’s pretend you expected to earn taxable income of $200,000 this year and expected a marginal tax rate of 32%. But due to pandemic-related factors, perhaps you only earned $50,000. Not only would you be in a much lower marginal tax bracket of 22%, but there would be additional “tax space” to declare income if desired before you’d get back to 32%. By doing a Roth conversion, you’d be able to get a significant amount of money into these tax-free retirement accounts while paying 22% to 24% in taxes — up to the $163,300 in taxable income at which the marginal tax rate returned to 32%. 

Full story on

Leave a Comment