A lot has happened in 2020, from the novel coronavirus and its effects on the economy to Congress adding trillions to the national debt for economic relief. This has created a need for financial professionals to implement comprehensive retirement tax planning strategies for clients.
Recent market drops allow proactive individuals to take advantage of reduced retirement account balances and to do Roth conversions. Clients would save on the amount of taxes due, thanks to the lower account balance.
With national debt approaching new highs, advisors believe that an increase in tax rates is inevitable. Not only that, the CARES Act, passed by Congress for coronavirus relief, also put a pause on required minimum distributions for 2020.
For advisors, the opportunity for tax planning is vital. But on the flip-side, many financial professionals also disagree about how and when is the best time to go about these strategies.
In an article on InvestmentNews.com, many advisors shared their thoughts on how they were coordinating tax strategies for their clients.
Tax Increases in the Future?
Anticipating higher taxes, adviser Salim Boutagy of Congress Wealth said he is “trying to get as many Roth conversions done as possible.”
“If former Vice President Biden is elected president of the United States, we probably should react to that in a way to protect our wealthier clients,” said Robert Keebler, partner at Keebler & Associates.
His remarks were during a recent webcast hosted by The American College of Financial Services. “We’re getting everyone ready to make very large gifts in November, depending on how the election goes.”
Another panelist, Jeffrey Levine, said tax increases are a reality.
“Whatever your political feelings are… we increased the deficit by another $1.5 trillion” during the COVID-19 crisis, said Levine, the director of advanced planning at Buckingham Wealth Partners.
“We have an unprecedented opportunity right now to transfer wealth for our wealthiest clients,” he said. “What I’m encouraging a lot of people to do is create your game plan” for both scenarios.
Aiming for More Tax-Smart Financial Strategies
Considering a Roth conversion and other tax strategies right now could save a lot of taxpayers from paying unnecessary taxes. The current market lull has left thousands of savers with lower retirement plan balances -- and an incentive to move ahead with conversions now.
After all, taxes might increase in some form or fashion after the election in November.
Clients who work with a financial advisor can often find deductions that they would have otherwise missed. They might not know about some of these deductions, even if they are smaller.
For example, a new deduction passed under the CARES Act allows for a deduction of up to $300 in qualifying charitable giving. That is even if you take the Standard Deduction.
More Practical Strategies You Can Follow
A financial professional can also help people discover other tax-reducing strategies that might make sense for their portfolio, too.
Tax-loss harvesting can be a good way to reduce taxable income. You can sell losing holdings in taxable accounts to generate capital losses.
Those who are still able to itemize their deductions can reap tax savings from charitable gifting of cash or property. Roth IRA distributions can also help reduce the long-term "tax drag" that might otherwise be on their retirement income.
How Can Annuities Help with Tax-Efficient Planning?
What about other tax-saving strategies? They may include the use of annuities to shelter taxable money and buying individual stocks or ETFs in taxable accounts.
There, the equities will qualify for capital gains treatment when they are sold. Bunching up medical expenses can also yield tax savings if you have enough of them to clear the 10% AGI limit in a given year of retirement.
Annuities can provide guaranteed income for life. They can also shield you from market losses if you put money in a fixed or fixed indexed contract.
Annuities Offer Tax-Advantaged Growth for Your Money
Fixed index annuities generally pay higher interest than fixed annuities over time. Your principal is still guaranteed, although the amount of interest that they pay is variable.
Indexed annuities earn interest based on an underlying financial benchmark, such as the Standard & Poor's 500 Price Index. Meanwhile, fixed annuities earn a predictable, guaranteed rate of interest each year.
The money grows tax-advantaged inside the annuity until you take withdrawals. If you need money from the contract, you can take it out via a free withdrawal. But be mindful of the early withdrawal penalty before age 59.5 (just like with retirement accounts).
There is virtually no limit on how much money you can put into a non-qualified annuity. However, you can't take a deduction for the contribution amount.
Tax-Beneficial Options for High-Income Earners
Municipal bonds can be a good alternative for high-income earners. The interest that they pay is exempt from both federal and state taxes (and local taxes in most cases).
Just be sure to have your financial professional calculate the taxable equivalent yield. That way you know if the particular bond you are buying is worth it.
As an alternative, you might look at a higher-yielding corporate bond. However, that doesn't carry the same tax advantage.
Other Options for Tax Planning and Growth
Treasury securities are exempt from taxation at the state and local levels, but not at the federal level. However, they are considered a pretty reliable place to park money.
They pay lower rates of interest than corporate bonds, but they are backed directly by the full faith and credit of the U.S. Treasury.
CDs offer no tax advantages. However, the ones issued by national banks and distributed through brokers usually offer a slightly higher rate than what you can get from your local bank.
Corporate bonds are also fully taxable at all levels, but pay higher interest rates than Treasury or municipal securities.
What Else Can You Do?
Generating income to net against your credits and deductions is another key way to save on taxes. If you lost your job this year or your business was forced to shut down, your income will probably be lower than normal.
This means that you may end up in a lower tax bracket than usual. You might consider this opportunity to sell some stock options or convert a traditional IRA to a Roth and enjoy a reduced tax bill on the transaction.
Making Your Retirement Plan Tax-Smart and Financially Confident
These are just some of the tax-saving strategies that you can use to lower your tax bill.
Consult with your financial professional for more information on how you can save money on taxes. They can coordinate this area of your planning with other crucial ones, including ensuring you have enough income for your whole retirement.
What if you are looking for a financial professional to help you? Or perhaps you want a second opinion of your existing retirement strategy.
At JenniferLangFinancialServices.com we specialize in annuities and no-market risk retirement planning. Take advantage of our complimentary consultation and give us the opportunity to earn your business.