KF Update – Year End Planning

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Good morning,

I hope this email finds you and your families well, and you had a wonderful Thanksgiving.

With the dust mostly settled around the election (except for an incredibly close local house seat), I thought we could shift focus to some year end planning items that could be helpful for clients to consider.

One popular planning tool that is available to clients is something called a Roth Conversion.  This means converting pre-tax money (within an IRA or 401k) to Roth.  The tax on the conversion would be paid now, but all Roth money including earnings is completely tax free going forward.  

Why would somebody do this, or why would it make sense?  If you are in a lower tax bracket now, which many retirees are, it could make sense to lock in these lower tax rates now.  Additionally, pre-tax monies are required to be distributed starting at age 72 (RMDs) to the tune of 4-5% per year to start.  At that point, you have less control over which tax bracket those distributions fall into.

We have our federal income tax brackets for 2020 below which is a tiered system.  If you are Married Filing Jointly (MFJ), your first $19,750 of income is taxed at 10%, between $19,750 to $80,250 at 12%, and then income above $80,250 jumps up to 22%!

For example, let’s say your taxable income for 2020 will be $70,000.  It might make sense to convert $10,250 from pre-tax to Roth, and “Fill Up The Bracket.”  This strategy can be done each year leading up to age 72, as a way to take more control over how your pre-tax monies are taxed.  This could be especially beneficial if you believe taxes will increase in the future.

Additionally, if an IRA balance is large, those Required Minimum Distributions (RMDs) could put you into IRMAA surcharge range shown below.  These are additional premiums retirees would have to pay to Medicare if their income is high in retirement.

One of our newest pieces of financial planning software allows us to do a comprehensive tax analysis for clients, including modeling different scenarios and tax planning tips.  Please contact the office if you would like us to provide you with a comprehensive tax analysis.  As with all of our financial planning tools, there is no additional costs, all included in our service offering to clients.

Here is a list of other considerations for year end planning:

  • Save your charitable donation receipts, you can deduct $300 as an above the line deduction for 2020.
  • Required Minimum Distributions (RMDs) were suspended in 2020, but will be reinstated for 2021.  If you had recently turned 72 or will in 2021, it could be beneficial to start planning for those distributions.  You can take them monthly, quarterly, lump sum, etc.
  • If gifting money, the annual exclusion is $15,000 per year, tax free.
  • Reviewing your investment allocations to ensure they still align with goals, time horizon, and risk tolerance.
  • Can you give yourself a “Raise for Retirement” in 2021, increasing contributions to IRAs and/or company sponsored retirement plans.
  • Review of estate planning documents and beneficiary designations to ensure they are up to date.
  • Are you eligible to contribute to an HSA, and if so, can you max those out for 2020?
  • If you have recently had a child, does staring a 529 make sense, and more importantly, do you have adequate life insurance coverage?
  • Qualified Charitable Distributions – If you will be taking RMDs in 2021, you can direct part of the distribution to a qualified charity.  Why do this?  Because unless you itemize, and very few people can, charitable contributions cannot be deducted from taxable income.  By sending money from your pre-tax IRA directly to your qualified charity of choice, your charitable donation can lower your taxable income.

The year 2020 has been difficult for all of us, to say the least.  Looking at the glass half full, we have some of the most amazing medical professionals and scientists in the world, working tirelessly on new treatments, the vaccine itself, and its distribution.  We are encouraged by the resiliency of the American people and the small businesses who are adapting to a new normal, and the bounce back in equity markets from one of the swiftest, most dramatic declines in its history.  While we have no idea what 2021 will hold, we are encouraged by these developments.

If you have any questions at all, or would like to schedule a meeting you can do so utilizing the button below or simply calling our office.  We wish you and your families a wonderful, safe, and healthy holiday season and look forward to a new year!

Best,
Clint

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