Smart Year End Financial Planning

Taxpayers seeking possible solutions to lower federal taxes for 2022 and the future should take a close look at three planning techniques that can be used individually or together.

TAX LOSS HARVESTING — using losses to offset profits — may be attractive when the market dips, but it doesn't make sense for all portfolios. For example, you cannot benefit from realized losses in most retirement accounts. However, in after-tax accounts, harvesting losses may be advantageous. Remember to consider the wash sale rule, which doesn't allow you to rebuy a “substantially identical” investment within the 30-day window before or after the sale.

Tax-loss harvesting is relatively simple. You sell an investment that has been held for at least one year, is underperforming, and losing money. Then, you use that loss to reduce your taxable capital gains and potentially offset up to $3,000 of your ordinary income.

ROTH IRA CONVERSIONS — The process involves transferring part or all the funds from a traditional IRA to a Roth IRA. The procedure itself is easy to do; the factors that go into deciding to convert the funds, however, are complicated. Each individual’s situation, including current and future tax bracket and income needs, must be analyzed to see if it makes financial sense. Remember that a Roth conversion is also permanent, so there is no option to transfer converted funds back into your traditional IRA.

In general, the benefits of a Roth conversion include:

• Tax-free withdrawals: After the minimum age of 59 1/2, all withdrawals from your Roth are tax-free because you already paid taxes on your contributions. In contrast, you must pay taxes on traditional IRA withdrawals because all contributions to the account were made with pre-tax dollars, and the IRS treats those withdrawals as ordinary income.

• No required minimum distributions: One of the advantages of a Roth IRA is that you do not have to take annual required minimum distributions (RMDs) from the account. With a traditional IRA, you are required (with a few exceptions) to begin withdrawing funds every year after you reach the age of 72, and you must pay income taxes on those withdrawals.

When considering a Roth conversion, it is important to understand when you will need the funds. It is to your advantage to let Roth funds appreciate in value and generate income as long as possible because the Roth grows tax-free. If you are near or at retirement age and will be using the money to enjoy this stage of your life, then a conversion may not make sense. Additionally, if you are planning to make lifetime or after lifetime charitable gifts with your IRA, a Roth conversion is not necessarily right for you.

One final “bonus” of having a Roth: If you do not use your Roth during your lifetime, a Roth conversion can be a smart estate planning strategy to pass down tax-free wealth to your loved ones. Beneficiaries will have to take RMDs, but those withdrawals remain tax-free if the account has been open for at least five years.

CHARITABLE GIFTS — Charitable contributions are one of the best tax-saving opportunities available. Not only does the charity benefit, but taxpayers enjoy tax savings by deducting part or all of their contributions on their tax returns. Making charitable gifts in the same year as a Roth Conversion can often be a great way to reduce your overall tax burden.

Note that the tax treatment of a charitable contribution varies according to the type of asset contributed.

TACTICALLY COMBINING STRATEGIES — Investors ought to consider taking advantage of any unique tax attributes they have that may offset or reduce the income tax owed from a Roth conversion. For instance, selling long-term investments at a loss or making charitable deductions in the same year as a Roth conversion can help alleviate or completely offset the tax from the conversion. If investors find themselves in a temporarily low-income year, a partial Roth conversion can serve to fill up the lower tax brackets. Furthermore, executing a Roth conversion during times of market volatility, when asset values are depressed, can reduce the tax cost associated with the conversion.

CAUTION — But before you take any action, please seek counsel from an experienced financial advisor and tax professional to make sure you reach a decision that will help you protect and grow your wealth and provide for your loved ones. A member of the PAC may also be able to assist with your specific needs.

Howard Safer is Vice Chairman at Argent Trust. He serves high net worth families with trust, investment, foundation, estate and family office services. He enjoys helping clients find holistic solutions to their financial planning needs. He is an active member of the Jewish Federation Professional Advisory Council (PAC).


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