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Smart Tax Planning Strategies to Consider While You Have the Luxury of Time

Key Takeaways

  • No one can predict where tax rates will be in the future, but they’re more likely to be higher than lower near-term.
  • Now is the time to put the wheels in motion; don’t wait until after the elections or the economy rebounds.
  • Now might be an excellent time to harvest investment losses, convert to a Roth IRA, or retool your estate and giving plan.

Tax planning is always a moving target. Whenever we have a change in the White House, or a new majority party in Congress, changes to tax laws (and rates) typically occur. With trillions of dollars of stimulus money being inserted into our economy on the cusp of a Presidential election, we are bound to see changing tax rates on the horizon. With local, state and federal treasuries badly needing funds, tax rates are more likely to rise than lower.

No matter where rates end up, many of the tax planning strategies we’ve been advising clients to consider in recent years still apply. However, there may be some additional considerations based on the potential for rate changes. Below are six tax planning options to consider while time is still on our side:

  1. If you are working, it’s still beneficial to maximize your tax-deductible retirement contributions. Even if tax rates rise, the long-term tax deferred growth in your account, combined with a tax-efficient distribution plan in retirement, will save you in taxes over the long run.
  2. If you own a stable, profitable business, consider a defined benefit plan (DBP). Depending upon your income and employee base, DBP contributions to owners and management can provide you with a substantial tax deduction. Now may not be the right time to start a DBP, but it may be a good option when the economy improves, and your high business income resumes.
  3. Maximize tax-free investment options through Roth IRAs and/or backdoor Roth IRAs. Backdoor Roth IRAs are often available to high income earners ineligible for traditional Roth IRAs. In addition, there are several retirement plans that offer after-tax contributions that can be converted to Roth IRAs. My colleague, James Nevers, explains more in his post about Microsoft’s 401(k) plan: Are You Taking Advantage of this Little Known Microsoft Retirement Plan Benefit?
  4. Consider moving money from your regular IRA and converting it to a Roth IRA. The conversion will be taxable, but your gains may be taxed at a lower tax rate now than in the future, when you need to withdraw those assets. Situations when this may be advantageous include:
    • Your ordinary income is down for the year, due to job loss or substantially lower business income caused by the COVID-19 pandemic.
    • You are retired, but not currently taking Social Security or required minimum distributions from your IRA or retirement plans.
    • The conversion is done in conjunction with a charitable planning strategy. One such strategy is to make a significant contribution to a Donor Advised Fund to maximize your charitable contributions and tax deduction, while simultaneously making a Roth conversion.
    • The conversion is part of your overall estate planning. By converting to a Roth IRA now, you potentially pay tax at a lower rate than your heirs will in the future. Furthermore, you maximize the long-term tax-free growth of the account that your heirs will inherit.
  5. Gift assets to your beneficiaries or a trust. The federal gift and estate tax exemption is currently $11.58 million per person. This exemption is historically very high and is slated to expire in 2025. Reducing the generous estate tax exemption could also be a high priority for of a new Presidential administration and/or changing majority in Congress. Now may be the time to consider gifting assets if that is part of your estate plan.
  6. Offset capital gains that you realized during the market downturn or realize capital gains now with a structured rebalancing plan. Capital gains taxes could go up in the future. It may make sense to bank some of your gains now at today’s lower tax rates.

Taxes Should Be Part of Your Long-Term Plan

Every tax planning opportunity is unique to each client’s situation. As with investing, tax planning changes should be made only after removing your emotions from the decision-making process. Ensure any changes you make are based on sound long-term planning, not kneejerk reactions to the current political, economic or public health situation. Policies change over time, but we as a country and a world continue to progress, innovate and adapt.

I know these are unsettling times. Contact me any time if you or someone close to you has concerns about tax planning or retirement readiness.

Todd Flynn, CPA, CFP® is a Principal at Soundmark Wealth Management, LLC. Todd works closely with physicians, business owners, and other high net worth individuals to help them define their financial goals and implement an ongoing financial planning process.

This report is intended to be used for educational purposes only and does not constitute a solicitation to purchase any security or advisory services. Past performance is no guarantee of future results. An investment in any security involves significant risks and any investment may lose value. Refer to all risk disclosures related to each security product carefully before investing. Soundmark Wealth Management, LLC, its advisors and its affiliates do not provide tax or accounting services. This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on for, tax or accounting advice. Please consult with your tax advisor prior to engaging in any transaction.

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