IDEAS FOR YEAR END FINIANCIAL REVIEWS
Given the dynamic that 2020 has brought us, we hope you’ve taken some time to review your overall financial, income, tax, and investment planning. In regard to this, what we’ve primarily seen is a large uptick of interest in retirement and tax planning.
One topic we’ve primarily seen is interest in Roth IRAs and Roth IRA conversions. It may not seem like it at first glance, but it appears that taxes are currently on sale! Roth IRA conversions, or shifting funds from tax-deferred accounts, like 401k and IRA accounts, to tax-free Roth IRAs, may make sense to take a look at for your portfolio. The national debt continues to spiral up, especially with this year’s COVID stimulus packages and national budgets, which leads many to understand that tax rates are likely to increase in the coming years.
The current tax reform of 2018 is set to sunset in 2026, if not sooner, which may lead to many investors considering sheltering some of their future income from Roth IRAs instead of Traditional IRAs. If you have been saving funds in these accounts over the last few decades and are now taking income from them, you’ve won the game! Achieving tax deductions at higher tax rates and taking income at the now reduced rates has worked very well.
However, if you’re still working and actively saving, it may make sense to start saving a portion of your income in Roth IRAs or moving funds to Roth IRAs at the current lower tax rates, while taking future income out tax-free should the tax rates go back up. Currently, the 12% tax bracket that many people are in, will be going back to 15%, and the 22-24% will be increasing to 24, 28, and 33%, seeing even more of a potential increase. Another advantage is that Roth IRAs do not have the Required Minimum Distributions that Traditional IRAs have starting at age 72.
The biggest deterrent of this shift is paying the taxes owed on a conversion. Any funds that you decide to move into Roth is taxed as ordinary income in that year, so we typically propose spreading this out over numerous years. As the saying goes, “How do you eat an elephant? One bite at a time.” The same can be said of Roth Conversions.
If you find yourself with a lower income year, or potentially a business loss, this could be a good time to consider Roth IRA conversions, especially maximizing your current tax bracket. As an example, if you have an effective tax rate lower than 20%, that may be more palatable to pay some of the taxes owed now, especially if you think your tax rate could be higher once you are taking retirement income from these accounts. Who doesn’t want to keep more of their hard earned money in the long run?
Another point of consideration is that Roth IRA contribution start a phase out limit of $196,000 in income to contribute new funds. In this case, we’ve seen certain types of life insurance policies act as another method of funding to create another stream of future tax-free income, should your income be above that threshold. There are different types and considerations of this planning, so make sure to work with an experienced team to construct this planning.
As always, if you’d like a complimentary second opinion for your planning or a review, please reach out to Douglas Marion with Advanced Wealth Strategies. Feel free to call or text (704) 765-3653 or email Douglas@PlanWithAWS.com. Their local office is conveniently located at 19520 W. Catawba Ave, Suite 313. Their firm will put your best interests as priority.
*Source: https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-ira-contribution-limits
Investment Advisory Services offered through AlphaStar Capital Management, LLC., a SEC Registered Investment Adviser. AlphaStar Capital Management, LLC and Advanced Wealth Strategies, Inc. are independent entities. SEC registration does not constitute an endorsement of the firm by the Commission nor does it indicate that the advisor has attained a particular level or skill or ability. Insurance products and services are offered through Advanced Wealth Strategies by individually licensed and appointed agents in various jurisdictions. Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance. The views presented here are the views of Advanced Wealth Strategies and does not necessarily represent the views of AlphaStar Capital Management, LLC. Advanced Wealth Strategies does not offer legal or tax advice.