Category Archives: Tax Planning

Posted on

How to make a ROTH Conversion Tax-Free in 2020

Many people know the benefits if they convert their Traditional IRA to a ROTH IRA but are still reluctant to do it because doing so would be a taxable event. There is an opportunity right now to do it tax-free. But you need to hurry.

First let’s review some of reasons to convert a Traditional IRA to a ROTH IRA:

  • Paying taxes at lower rates after retirement
  • NO required minimum distributions from ROTH
  • Lower taxes on Social Security during retirement
  • Lower Medicare premiums throughout retirement
  • Lower tax rates for married couples vs. single
  • Eliminates future tax rate uncertainty
  • Lower Medicare surtax on retirement income
  • Tax free distributions for beneficiaries
  • Estate planning considerations

So how can I have my cake (the ROTH Benefits) and eat it too (avoid the taxes on conversion)? You will need to hurry.

Recall that the CARES Act enacted on March 27, 2020, changed the limitations that are usually placed on charitable gifts. Ordinarily, cash contributions are limited to 60% of your adjusted gross income in the year the gift is made. Recognizing that charities are also hurting from the impact of the virus, Congress modified the limits for 2020. This year, and this year only, the deductible limit is 100% of adjusted gross income.

So the solution can be as simple as converting a portion (or all of) your Traditional IRA to a ROTH IRA and making a qualifying charitable contribution of the same amount. The contribution should not come from your IRA. It will come from your other accounts. To qualify for the higher limit, the gift must be a cash contribution directly to the charity. That is, it cannot be appreciated assets or made to start or maintain a donor advised fund. But you need to hurry and get both done in 2020.

I am making the assumption you itemize deductions on Schedule A of your tax return. Your charitable giving added to your other itemized deductions (medical and dental expenses, taxes you pay, interest you pay, casualty and theft losses, and other itemized deductions) must exceed the standard deduction allowed for your filing status. The standard deduction was increased by the Jobs Act in 2017.

Your financial advisor should be able to prove the benefit of this strategy by modeling various scenarios. We typically model this in two ways:

  • conversion vs. no conversion (status quo) this year
  • conversion with charitable contribution this year vs. next year

As with any significant tax maneuver, you should consult with your own tax advisor / preparer before making either of these moves.

Posted on

Is this a new normal?

Do you call the time BC (before Covid-19) normal? Do you join me in hoping that life can get back to normal soon, but have serious doubts about that? What if this is normal? I believe we need to talk about what we have learned and how we might think about going forward.

7 Things to think about now

  • Ordinarily we financial planners are demonstrating the value of working longer, i.e. postponing retirement. But this month, we have been more engaged with evaluating those clients who are thinking of retiring earlier than originally planned. If you are eligible and have the assets or guaranteed income to retire now, this could be an attractive scenario. Of course, an early retirement nearly always results in less to spend for the rest of one’s life. I know that it might feel scary to even think about, but now would be a great time to determine the true cost of retiring now. Social security benefits factor into that and a Social Security Timing Analysis would be great place to start.
  • Do you find one of the benefits of being quarantined is that you are spending less and saving more? If you are like many we have talked with, your expenses have dropped a lot over the past three months. (I have bought one tank of gas since February and I still have a fair amount of it left.) Perhaps you have some pent up demand to get back out to restaurants or to travel, but several people tell me that they have been surprised to learn what they can do without. That doesn’t bode well for our consumption and debt-based economy, but it could truly be our new normal. Could these past couple of months be a good representation of what retirement spending looks like? You should add in some fun however, just to be safe.
  • Do you need a vacation? Like many of you, I still don’t feel safe getting on an airplane or cruise ship. The opening up of various countries is going to likely be pretty chaotic. Leaving the U.S. might be easy, but getting back in from some of the hot spots around the world could be harder in the coming months. We’ve heard more than one person plot their vacation with a plan to stay within a comfortable drive from home. Popular U.S. destinations could even get to be crowded, so if this is in the cards for you, plan early.
  • Of course, it’s never fun to think about updating your estate plan, but we are in the middle of a life-threatening pandemic. If not now, when? We can help you review your existing plan by mapping the current estate structure into a flowchart. We would then make suggestions for you to discuss with your lawyer if you don’t like the results. That’s all I will say about that.
  • I think you will agree that insurance of various types represents protection. It would be a good idea to review your current policies and to determine if you have the right type and the right amount. I was able to get my auto insurance premium reduced considerably with a revised estimate of how much I think I will drive in the next twelve months. It took about 15 minutes to save 15% and I didn’t have to switch to that popular company to do so.
  • Is it time to re-finance? Consider how much debt is appropriate for your current circumstance. And while you are at it, consider the kind of debt and the interest rate on any debt that you carry. We heard about sub-3% interest rates on home mortgages this week. Prime is 3.25%. Refinancing current debt loads should probably be high on your list. You are going to hear a lot about personal de-leveraging (paying down debt) as we move into the new normal. We see a lot of people switching from 30 year mortgages to 15 year.
  • Tax laws have changed a lot this year as a result of stimulus measures. Required minimum distributions from retirement plans have been waived entirely. If you have already taken your RMD, you can roll it back into the IRA and avoid paying the tax. You should likely consider a ROTH conversion this year. The first two estimated payments for 2020 have been delayed until July 15th, along with the filing deadline of 2019 returns. Student loan payments and interest have been deferred. The treatment of charitable contributions has changed. If any of these provisions could benefit you, a revised tax projection for 2020 and 2021 is in order.

It is so easy to let inertia set in and avoid any consideration of money issues. But as I’ve often said, “Better decisions today yield better outcomes tomorrow.” Your financial plan is your road map and it should be dynamic enough to handle multiple scenarios for casting a best-case, worst-case, and somewhere in the middle. If nothing else, these last three months should have been instructive in thinking about risk tolerance. We are here to help you with any of these things. Reach out with any questions. We are a phone call or ZOOM meeting away.

June 29, 2020

Posted on

Believe it or not . . . it’s time to plan for 2020 taxes

Of course many people start to think about taxes this time of year since last year’s 1099’s, W-2’s, and other tax documents begin arriving in the mail or inbox. But guess what? Now is actually the time to start thinking about reducing your tax bill for 2020.

Taxes are getting a lot of attention these days. President Donald Trump and his supporters are touting the virtues of the 2017 Tax Cuts and Jobs Act (TCJA) while the democratic candidates who wish to unseat him in 2020 are focused on repeal or other tax generating proposals. Last year was the first year for tax returns prepared under TCJA. AAII quotes a Gallup poll from April 2019, in which they determined that 49% of respondents disapproved of the TCJA. Slightly more than one out of five said that their taxes increased as a result of the act.

It could be that many individuals did not properly plan for the implementation and had too little withheld resulting in a larger tax due or a smaller refund than they had on their 2017 return. We wrote about the impact on paychecks in a blog post in early 2018.


A big reason for the difference in 2017 and 2018 returns was most likely the loss of itemized deductions. That happened for one or two reason: 1) some deductions (e.g. miscellaneous deductions) were eliminated entirely and others were reduced (e.g. state and local taxes) or limited (e.g. interest deduction) for certain filers; 2) the standard deduction was raised to a level that meant approximately 10 million taxpayers earning between $100,000 and $200,000 went from using itemized deductions to taking a standard deduction. We expect to see an even bigger use of the standard deduction this year.

The moral of this story is that effective tax planning does two things for you: 1) it eliminates surprises when you actually file and 2) it gives you a chance to find deductions or adjustments that you might have otherwise missed.

At our firm we utilize a very complete tax planning tool published by Bloomberg. We start the process for our clients by entering their most recently filed tax return. Right now, that would be the 2018 return for most people. Although rare, sometimes we are able to catch mistakes made in the preparation of that return and can advise the client to file an amended return. (It’s always a good idea to catch AND CORRECT your own mistakes before the IRS does.)

We don’t prepare returns, but when the 2019 data become known, we can setup the projection to show the impact for last year. We like to do that even before you turn your data over to your tax preparer. That will give you an estimate of what to expect. One client, after seeing our projection, went back home to hunt for more deductions. Of course, if we are managing the investment assets, we already have the interest, dividends, and capital gains and can plug in the actual numbers to make the projection more accurate.

After setting up the tool with the previous return, we have a good idea about what to expect for the current and next year. We project at least two years into the future (currently 2020 and 2021) in search of tax saving ideas.

We also model different cases to reflect the impact of each of those ideas. Some alternative cases can be combined for even more tax savings.

While we are on the subject of taxes, we have a resource for you to download if you like. It is a two-page listing of relevant tax data for 2020. I have also included the 2019 data for comparison and to assist you in preparation of your return. The download is free.

Click here to request the 2020 Key Financial Data resource kit.

If you would like to consider this kind of tax planning while you’re gathering your 2019 data, drop us a line or give us a call.

January 3, 2020