Year-end is peak time for reviewing your financial progress – and opportunities. Tax preparation season is not far off, and the days to impact your 2019 income are nearly gone. Before you ring in a new decade, schedule time with your financial advisor to review these five year-end planning options that might apply to you:
Utilize a Roth conversion to take advantage of low tax rates. The recent tax law reform reduced income tax rates to their lowest in decades. However, they’re set to expire in 2026 (or sooner, pending Congress action). Given rising federal budget deficits, taxpayers can consider converting a Traditional IRA to a Roth IRA now, hedging against the risk of higher tax rates in the future. If we determine how much income can be realized in your current tax bracket before jumping up to the next, that’s a good guideline for how much in traditional retirement funds to convert to a Roth.
Review your required minimum distributions. The Internal Revenue Service has rules for investors taking required minimum distributions from retirement accounts. The penalty for not taking a required distribution is 50 percent of the required amount! So, before we say ‘goodbye’ to 2019, talk with your advisor to ensure you’ve satisfied minimum distribution requirements.
Identify opportunities to harvest tax losses. If your portfolio has realized significant gains this year, it might be possible to sell an investment with a loss, offsetting those gains and reducing your tax liability this year.
Offset income from a Roth IRA conversion with business net operating losses. If you own a business and will realize a net operating loss for 2019, consider converting a Traditional IRA into a Roth this year. The income from your Roth IRA conversion will essentially be tax-free if converted during a year where you have no income, and thus, your tax bracket is zero. Net operating losses can be carried forward to offset up to 80 percent of ordinary income on future tax returns.
Review your portfolio’s tax liability status. Tax liabilities should always factor into fund allocations and the diversification of retirement assets. It’s a good idea to review your investment portfolio in light of these categories: taxable, tax deferred and tax free. Advisors are mindful of this diversification when constructing the portfolio but also when withdrawals are needed. It’s something you should look at together at least annually.
You have until Dec. 31 to affect this year’s income, so make good use of these final days of 2019!
Blog by Aaron Waters, Wealth Advisor.
Category: Financial Service Team