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.

The Roth IRA
Slott, who is often billed as America’s IRA expert in his presentations at conferences and on PBS television, also addressed the future of the accounts.

One of the most potent tax planning tools available to advisors and their clients, Roth IRAs allow clients to take tax-free withdrawals in retirement under the right conditions. As long as a client is past the age threshold of 59 and a half, before which a 10% tax penalty is levied on any IRA withdrawals, the money comes out without being taxed, as it was already taxed as income before it was contributed to the IRA.

But many advisors and their clients believe that the Roth IRA is in peril—that the U.S. government will try to eliminate the tax-free withdrawals before investors can take advantage of them.

“I love Roth IRAs, I believe in them, and I love Roth IRA conversions,” Slott said. “I love the idea of never having to worry about taxes. But when I talk about Roth IRAs, I get passionate responses that I’m not representing the other side. They ask ‘Can I trust the government to keep their word that Roth IRAs will always be tax free?’ The answer is absolutely not, you can’t trust these guys as far as you can throw them, and tax laws always change.”

However, Slott said it is unlikely that Congress will do away with the tax-free characteristics of Roth accounts.

For one thing, the wheels of change move very slowly, and Congress is more likely to make incremental changes to retirement accounts than a wholesale shift in tax policy.

For another, Congress likes “Rothification,” said Slott.

“Secretly, Congress love, loves, and I mean loves, Roth IRAs. They’re addicted to them like crack. They love the money that comes in up front from Roth IRAs.”

With traditional IRAs, income taxes are deferred until money is withdrawn from the account, but in Roths, taxes are paid before contributions, he said. Congress would rather have less money now to support their budget authorizations than more money in the future to support the proposals and programs of a different set of legislators.

Thus, the Roth IRA should continue as a valuable tax-planning tool for some time to come.