Author: John Reagan
As of today, general equity markets are ~10-20% off their peak, tax rates are relatively low, and there are record amounts of cash on the sideline. This combination of variables presents an excellent opportunity for a strategy known as a Roth Conversion. A Roth Conversion is the process by which you take money in a pre-tax account (e.g. traditional IRA) and convert it to an after-tax account (e.g. Roth IRA). The potential benefits of such a change include:
- Tax-free growth inside the Roth IRA
- Tax-free distributions from the Roth IRA
- Avoiding required minimum distributions until you (or possibly you and your spouse) pass away
- Lower estate taxes
- Lower surcharges on Medicare premiums
For more information on Roth conversions, see the paper we created to provide more detail on this strategy, as well as the pros and cons of Roth conversions.
While this all sounds great, and it is, to receive these benefits, you have to pay ordinary income taxes at the time of conversion. This is a strategy worth considering if you are in a relatively low tax bracket because you recently retired and haven’t yet started receiving your Social Security or taking required minimum distributions. Even if you are in a higher tax bracket, it could still make sense because we could implement other tax strategies simultaneously. If you’d like to know the specifics around this strategy or any different ways we help clients maximize their long-term odds of success, we’d be happy to talk with you.
Around this time of year, taxes are near the top of just about everyone’s to-do list. At Hill Investment Group, we think about taxes every day of the year, working to maximize our clients’ after-tax returns. That means we not only try to maximize the returns in our clients’ portfolios but also limit the amount of money they have to pay in taxes.
Some of you may have already filed your taxes, and good for you. For those that have not already filed, below we share a few tips you can use to hopefully reduce the amount you send to Uncle Sam for 2021.
Contribute to your IRA: Saving in a traditional IRA is one of the simplest ways to reduce taxes. You can contribute up to $7,000 to a traditional IRA (if you are over age 50) and count it as a 2021 contribution to potentially reduce your income.
Contribute to a Health Savings Account: If you are covered under a high-deductible healthcare plan, a family can contribute up to $8,200 (if the owner is over age 55) to a Health Savings Account (HSA) and count it as a 2021 contribution. This is an often-missed opportunity. We were told by one CPA that if you can only contribute to your HSA or 401(k), they would pick the HSA for the tax benefits – quite an endorsement.
Charitable Contributions: Married couples can deduct up to $600 of cash charitable contributions even if they take the standard deduction. So, although you may not have other deductions, be sure to keep track of those cash gifts you made in 2021.
As with all tax planning, we recommend you connect with your accountant or CPA to get more information on your specific situation.
Ready to meet someone with the heart of a teacher? Charles Kafoglis is our featured video this month and it’s worth a watch. Charles brings decades of client service experience from his days as a management consultant. Most recently, he has been working with teens and young adults to instill financial literacy skills, sorely lacking across all levels of our education system, helping them launch their careers with a sound financial foundation. He appreciates the value of listening, making a difference, and practical problem-solving. We think you’ll love Charles as much as we do!