Tax Extension

The tax filing deadline was Tuesday, April 15, but we’re filing for an extension on tax planning talk! Let’s be clear, tax planning isn’t just about minimizing your tax bill this year, it’s about building an efficient, multi-year plan to help protect your wealth over time.

The Big News — Given recent market declines, Roth IRA conversions are “on sale.” With markets off their highs, traditional IRA assets can be converted to a Roth IRA at lower valuations, which means less tax owed on the conversion.

What’s A Roth Conversion? — A Roth IRA is a retirement account with several advantages, primarily that investment returns in the account and withdrawals from it in retirement are all tax-free. Individuals can move assets from other traditional retirement accounts into a Roth IRA, but the amount transferred is taxed as income in the current year.

It’s All Bracket Management — Investors should seek to maximize the amounts taxed at the lowest possible levels over their lifetimes.

• If your annual income is currently lower than you anticipate in the future, filling up the lower tax brackets now can reduce your future tax liability.
• Currently, up to 85% of your Social Security benefits can be taxed. Coordinating retirement distributions with claiming benefits can optimize taxes.
• We are in a historically low tax rate environment; taxing retirement savings now could cut what you’ll owe if rates go higher in the future.
• Converting to a Roth can reduce or eliminate the “widow’s tax” -- pushing a surviving spouse’s marginal rate higher as a single filer.

Other Tax Planning Opportunities —

• If you have a high-deductible health insurance plan, contributions to a Health Savings Account (HSA) can be a great deal. Contributions are pre-tax, can be invested to grow tax free as long as the withdrawals are used for qualified medical expenses. Think of it as an IRA dedicated to medical expenses.
• Taxpayers that give regularly could consider bunching planned donations into a Donor Advised Fund to get a deduction. Don’t forget to give appreciated securities to avoid tax on gains.
• If you’re 70 1/2 or older, Qualified Charitable Distributions (QCDs) can be made from your retirement accounts that are not included in taxable income.
• Consider giving to children or grandchildren in a 529 plan for college expenses. In Michigan, up to $10,000 can be deducted from income on your state tax return.
• If you’re still working, higher earners can utilize a back-door Roth IRA strategy to build more in those advantaged accounts.

Everyone’s tax and income situation is different, and there’s a lot to sort out. We collaborate regularly with clients to identify what options may be available, and to model their scenarios to see which have the most impact.