Well, we are almost ready to put 2020 behind us.
From a social, economic, and health point of view, 2020 was certainly the pits.
From a financial point of view, as long as you were either retired or were able to hold onto your job, it was not so bad for most people.
Returns on most of our diversified portfolios, both growth and income oriented, were pretty good, despite being a tumultuous year. The problem isn’t so much with what your money is doing – it is that there is nothing to do with your money!
Year end tax maneuverings. As we approach the end of the year, I’ve been poring over all my investment client accounts checking for tax opportunities, or maneuvers that can reduce tax liability either for this year, or in future years. Several year end strategies involve the use of Roth IRAs. We love Roths because the money can grow tax free forever. Even after you die and leave the money to your kids, it remains tax free for up to 10 years after your death.
Take advantage of today’s low tax on low income. There is a lot of chatter that the 2017 tax cuts benefited only the wealthy. Not entirely true. Tax rates on income under 80,000 are lower than they’ve been in recent memory. And they will be going back up in a few years. If you have a sizable IRA but low income this year, it may be wise to convert existing retirement account money to a Roth IRA. Conversions are taxable income, but to the extent you can keep taxable income under about 80k per year, your federal tax liability is only 12% - historically low. So if you estimate your taxable income (after all deductions) will be, lets say, $60,000 – you can convert up to about $20,000 of income to a Roth and only pay 12% federal tax. Then that money, and all its future growth, will be tax free forever!
We have been looking for opportunities to take advantage of this maneuver. If we see such an opportunity in your portfolio, we likely would have reached out already – but if you think this applies to you, give us a call, we’ll have another look. Conversions, unlike IRA contributions, have to take place before the end of the year, so there’s not a lot of time to act. There are many considerations that go into a decision to essentially pay tax now, to avoid tax later. Future and current income projections, estate considerations, expectations of future tax rates - all this needs to be considered. It is one of those decisions that is almost impossible to make outside the context of a sound financial plan.
Make a Roth Contribution, if you can! Roth conversions are usually a strategy for the already retired - but if you have income from work this year, why not make Roth IRA contributions. Roth IRA’s are powerful tools for long term retirement planning. Generally you can only make Roth IRA contributions if your household income (AGI) is under $206,000. If you think you qualify and would like to consider a 2020 Roth contribution, let me know! There is more time here, since IRA contributions for 2020 can be made right up until April 15. We have reached out to many clients we think would be good candidates, but if you think you qualify, let us know!
Make too Much to Contribute to a Roth? Maybe not. Even those making more than $206,000 may have a way to contribute to a Roth using the so-called backdoor Roth contribution. These are a little trickier and the strategy can't be used by everyone. Generally if you have any sizable pre-tax IRA accounts, this is off the table – but if your only retirement savings is in employer 401k accounts there may be a way to “get around” the $206,000 income limit on Roth contributions. You simply make a contribution AFTER TAX to a traditional IRA. You can do this regardless of your income, and regardless of whether you participate in a 401k, After a period of time (1 month to 1 year) you convert the IRA to a Roth. At this point, you pay tax on any gains, but you don’t have to pay tax on the original $ contributed to the IRA (since it was an after tax contribution). Yeah, it makes you jump through a few hoops, but if you do it every year, its worth it as you can build a substantial TAX FREE Roth balance over time.
Again, if you are one of our investment clients, and we think a backdoor Roth is something you should consider, we have probably already reached out to you.
The Great NJ Tax Cliff. We have also try to keep a close eye on New Jersey retirement income for retirees. New Jersey exempts most retirement income from taxation for residents making under $100,000 in NJ taxable income (which tax burden of living here. But the problem is that IF YOU MAKE $100,000.01 – you don’t qualify for the tax exemption and owe tax on the entire $100,000 in income. Yes, making ONE PENNY over $100,000 could subject you to tax of roughly $4000 or so. We try to watch out for this in our client financial plans (learned the hard way) and if we see a risk coming, we can always help you find a way to defer some income.
There's not a lot of time left in the year. If you want to discuss potential tax maneuverings, give us a call.
Oh and have a wonderful and blessed holiday season!
Jim, Carlos, Luba and Alex