There are two big reasons advisors and their clients should engage in end-of-year tax planning in 2022, and both are relevant to the country’s fiscal and economic health, said Ed Slott, president of Slott & Co.
This year in particular advisors can add value, said Slott while presenting during “Investing in Inflationary Times: The Market Outlook 2023,” a Tuesday conference from Financial Advisor magazine in cooperation with MoneyShow.
“Everybody complains that inflation is here and everything costs more,” said Slott. “There isn’t really anything you can do other than earn more or save less—or spend less. You need more money because things cost more.”
There are good reasons to go make tax moves now, he said.
Tax Policy
Roth IRA conversions allow clients to pay taxes on traditional IRA contributions and move them to an after-tax Roth account—but whether a Roth conversion is a good idea comes down to one simple question, said Slott: Will your client pay a higher tax rate now, or in the future when they might really need the money?
If the answer is higher taxes now, the Roth conversion makes less sense, as a traditional IRA allows income taxes to be deferred to your client’s lower-tax future. But if you feel as if your client’s tax rates will increase in the future, then it makes sense to pay the taxes to convert to a Roth IRA now to avoid the higher future tax rate.
But with tax rates at historic lows, Slott believes that for most investors the time to take a Roth conversion is now and over the next several years, when taxes should remain relatively low.
“The worst-case scenario is that you lock in a 0% tax rate on those funds for the rest of your life, and for at least 10 years after that for your beneficiaries,” he said. “You never have to worry about if tax rates go higher.”
And taxes are likely to go higher, said Slott, with recent record deficit spending and rising interest rates on the national debt.
Inflation, too, makes it an attractive time to convert to Roth IRAs, since income tax brackets are going to widen, which will allow advisors for a limited time to convert even more money from traditional to Roth IRAs without pushing their clients to higher tax brackets.