There has been a lot of concern recently over the landscape of taxes in the US, and what next year might look like for our tax system. At the time of this writing, we are still waiting (some of us with bated breath) to see what Congress finally passes in the final bill. However, even in all this uncertainty, there are a few things you can do now to be smart about your tax bill for 2021.
Consider Roth IRA conversions.
I’ve already talked to many clients about this, and now it is more important than ever. It’s quite likely that the popular “backdoor Roth IRA” contribution strategy will close this year. That’s the way that many higher earners have been able to make Roth IRA contributions since 2010 (if you have questions about this, please email me!). When/if this strategy is no longer allowed by Congress, there are still ways to get money into a Roth IRA. Conversions could be one of those ways.
If you have most of your retirement savings in a traditional IRA, 401k, or 403b, you may want to take a look at Roth IRA conversions. Converting some of your money from tax-deferred to tax-free can be a good idea to help you have more control over your tax liability in your retirement years. And with increased tax rates almost surely on the horizon, converting now at lower tax rates could be attractive for many taxpayers.
NOTE: While changes to Roth IRA conversions are also potentially on the table for the new bill being debated by Congress, the nature and timeline of these is unclear. IRA expert Ed Slott recently commented that the current version banning Roth conversions wouldn’t take effect for 10 years from when the bill is enacted, which would give planners a good amount of time to help clients with their retirement planning strategies.
If you have Required Minimum Distributions (RMD’s), consider Qualified Charitable Contributions (QCD’s).
First off, don’t get confused as to whether or not you have RMD’s this year: last year, they were suspended, but this year, they are back in force. If you are over age 72, and you own a tax-deferred account (IRA, 401k), it is likely you will have an RMD this year. You need to be sure you take the money out before December 31st, because if you don’t, the penalty is a whopping 50% – one of the highest in the tax code! If you are unsure if your account is subject to an RMD, or if you are unsure of the amount or whether you have taken it yet this year, I suggest you contact your financial advisor right away.
Next: if you haven’t taken your RMD yet for 2021, and if you are charitably inclined, you might consider using a QCD: making a contribution directly from your account to the charity of your choice. Not only does this benefit the charity and the cause that you support; it also is not reported as taxable income to you, which is a big win-win. You can satisfy your RMD, help out your charity (or several, if you choose), and avoid additional taxes. If you have questions about using a QCD, please contact us and we’ll be happy to walk you through it.
Check to see if you are maxing your 401k/403b.
Unlike IRA’s, these employer-sponsored accounts must receive contributions through payroll. That means they must be maxed by December 31st (rather than having that extra time in the first quarter to make additional contributions like you can with an IRA). Why would you want to put away as much money as possible into a 401k or a 403b? Two reasons: they are tax-deferred and not subject to income restrictions. So even if you are a high-income earner, you can potentially get a tax break by contributing to these types of accounts. The max for 2021 is $19,500 if you are under age 50 and $26,000 if you are over age 50. You may want to check how much you have contributed so far this year, and if you can, increase your contributions to try to reach the max over the next two months to receive the maximum tax break.
Bonus: and while you’re at it, check your withholdings (for W2 employees).
If you are making more this year, are you withholding enough? Have you slid up into a higher tax bracket without realizing it? Don’t be shocked by a higher tax bill next year; you can check your estimated withholdings using this calculator.
I hope these short tax tips help you make smart choices in the last few months of 2021. It’s a good idea to consult with a knowledgeable tax advisor, as well, regarding your personal situation.
Shadowridge Asset Management, LLC does not offer tax planning or legal services but may provide references to accounting, tax services or legal providers. They may also work with your attorney or independent tax or legal advisor.