The year of the pandemic has created a sense of urgency about lots of things, including people’s health, finances, education … practically everything.

But it’s also forcing people to rethink their tax planning, and it has created a huge opportunity for converting clients’ traditional IRAs into Roth IRAs, according to a number of financial advisors who wrote in to Financial Advisor.

Why now? Because federal legislation has waived required minimum distributions this year. At the same time, small-business owners, especially those working in industries like food and retail, are likely seeing themselves fall into lower tax brackets. That means they might pay less to convert their traditional IRAs into Roths now, in order to get an overall lower tax bill on retirement monies in the future.

The Coronavirus Aid, Relief, and Economic Security (CARES) Act, waived required minimum distributions that retirees would otherwise have to have taken from their retirement plans (they must start taking these distributions at age 70½). The IRS has also allowed those who have taken these distributions already this year to roll them back into their plans by August 31, 2020.

Advisors say that converting retirement money, and paying the taxes on it in lower brackets now, will help protect you from higher tax brackets later. Overall, you keep more in your pocket.

“From a tax planning standpoint, it’s probably the greatest year ever since the tax reform to do Roth conversions,” said John Bohnsack, an advisor at Briaud Financial Advisors in College Station, Texas. “There’s going to be a lot of people with a lot of really low income, whether it’s because of [reduced] business income or required minimum distributions being waived.”

Which means creating some taxes whose rates you can control is probably a good thing to do this year, he said.

While going all the way and paying zero taxes might seem appealing, too, it’s not necessarily efficient. On Bohnsack’s blog, he uses the example of a hypothetical couple taking out $100,000 in retirement distributions and $30,000 in Social Security (85% of which is taxable). With the standard deduction of $27,400, the taxable income adds up to $102,600, and the tax comes to $14,152 at a marginal rate of 22% for couples.

Wait until next year, and you’re going to be back in that 22% bracket. However, he says, if the couple takes out $77,500 this year, all else being equal, the taxable income comes to $80,100 and the tax liability is $9,217. The marginal couples’ rate is 12%.

Again, the key is to think of the higher tax rates you avoid in the future, and now politics come into play. The Tax Cuts and Jobs Act and its attractive tax brackets will go away in 2025, said Alex Koury at Hosler Wealth Management in Scottsdale, Ariz.

“The current tax brackets are set to expire in 2025, and if they are not extended it is likely taxes will go higher,” Koury said. “Our national deficit and debt [have] exploded this year.” Another reason to avoid future brackets, in other words.

First « 1 2 » Next
To read more stories , click here