Senate Cents: A Financial Wellness Blog

Tax year 2020 brought changes that affect individuals and families. Learn how the new rules can help those saving for education and retirement.

The pandemic impacted the 2020 tax rules in several ways. New retirement account rules make it easier to build your nest egg and, if necessary, access it with fewer penalties. In addition, many deduction and tax credit amounts, including those for education tax breaks, were adjusted upwards to account for inflation.

Penalties waived on retirement account withdrawals. While many new rules pertain to seniors, a few traditional retirement account changes help younger taxpayers. The usual 10% penalty for early withdrawals (before age 59 ½) from your retirement account is waived for up to $100,000 of coronavirus-related distributions.¹ You’ll still have to treat distributions as taxable income, but you can do so in three yearly installments. You also have three years to replace the money and avoid taxes on the distribution.

Retirement plan contribution limits rise. For 2020, you maximum 401k contribution rises $500 to $19,500.² IRA contribution limits are unchanged at $6,000, but the adjusted gross income (AGI) ceilings for contributions to Roth IRAs increased $206,000 for couples and $139,000 for individuals. You can now deduct some or all of your traditional IRA contributions if your AGI doesn’t exceed $75,000 (for single filers) or $124,000 (for couples). The limits also rise for an uncovered spouse when the other spouse is covered by a retirement plan.

Standard deductions and income thresholds are higher. If you file as a married couple, your standard deduction rises to $24,800.³ For singles, the deduction rises to $12,400, and it goes to $18,650 for heads of households. Blind folks can deduct an extra $1,300, or $1,650 if unmarried. The income thresholds for long-term capital gains taxes rise. For example, the 0% bracket now ends at $40,000 for single filers and $80,000 for joint filers. The caps for the 15% bracket also rise.

Higher cutoffs for education tax breaks. You can qualify for some or all of the Lifetime Learning tax credit if your modified adjusted gross income (MAGI) doesn’t exceed $69,000 (for single filers) or $138,000 (for couples).⁴ The MAGI limits also rise for tax-free EE Savings Bonds you cash in and use for tuition. You can shield some or all of the bond proceeds for MAGIs up to $153,550 (couples) and $97,350 (single filers). Finally, you can withdraw up to $10,000 from your 529 college savings plan to repay student loans.

But wait, there’s more. This just scratches the surface, and we have resources to help you navigate through all of your options. Contact our partners at Fellows Financial Group to discuss how taxes can impact your long-term retirement plan. A Fellows' Advisor can help you make sure you're in a position to take advantage of any potential opportunities.

Connect with a Fellows' Advisor >>   Learn More About Fellows at ussfcu.org/fas >>

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Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Wealthcare Advisory Partners, a registered investment advisor. Wealthcare Advisory Partners and Fellows Financial Group, LLC are separate entities from LPL Financial.

This material was prepared for Michael Schimmel, Fellows Financial Group Advisor, and does not necessarily represent the views of the presenting party or their affiliates. This information has been derived from sources believed to be accurate. Please note—investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting, or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax, or legal advice and may not be relied on for the purpose of avoiding any federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.