New Tax Rates Could Provide Push to Help Defuse Your 'Tax Time Bomb'
If 401(k)s and IRAs make up the majority of your retirement savings, with today's lower tax rates, it could make sense to steer more of your money into Roth accounts or properly structured and funded life insurance policies.
Financial advisers consistently caution savers about the dangers of stockpiling too much of their retirement money in tax-deferred investment plans. Do a quick online search of the term “ticking tax time bomb,” and you’ll see that advice goes back at least a decade.
What Retirement Savers May Want to Consider Doing Now
If that isn’t incentive enough to reposition a portion of your nest egg ASAP, I’m not sure what is. Alternatively, consider:
- Contributing to a Roth instead of a tax-deductible retirement account for married couples with incomes of up to $339,000 who are using the $24,000 standard deduction (putting them at the upper limit of the 24% tax bracket). Couples with incomes above $339,000 should have a tax professional run the numbers.
- Contributing to regular tax-deductible retirement accounts and using the “backdoor Roth” strategy to convert to a Roth. Note that there are additional restrictions to consider before implementing this strategy.
- Rolling over tax-deductible accounts into a Roth. In my opinion, this should be spread over a maximum of the next eight tax return years up to at least your 24% tax bracket.
- With the use of professional advice from a CFP® or other qualified financial planner and a qualified tax adviser, starting a maximum seven-year life insurance contribution plan. This plan should meet all the IRS MEC avoidance guidelines with maximum contributions and minimum death benefits with the potential for tax-free income via policy loans starting in year eight or later.
You can wait until 2025, when the new tax rates are set to expire. (Although, if there’s a change in administration, that window could grow smaller.) Or you could make things a bit easier on your pocketbook and convert a little each year for the next few years. But now is the time to talk to your financial adviser and tax accountant about what converting tax-deferred dollars to after-tax dollars could mean to you.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Find out if it makes sense to start defusing your potential “tax time bomb.”
Kim Franke-Folstad contributed to this article.
It's important to remember that most life insurance policies are subject to medical underwriting, and in some cases, financial underwriting, and the costs of a life insurance policy is dependent on your age and health at the time of application. Life insurance products contain fees, such as mortality and expense charges, and may contain restrictions, such as surrender charges. If properly structured, proceeds from life insurance are generally income tax-free.
Policy loans and withdrawals will reduce available cash values and death benefits and may cause the policy to lapse, or affect guarantees against lapse. Additional premium payments may be required to keep the policy in force. In the event of a lapse, outstanding policy loans in excess of unrecovered cost basis will be subject to ordinary income tax. Tax laws are subject to change and you should consult a tax professional.
Neither the firm nor its agents or representatives may give tax or legal advice. Individuals should consult with a qualified professional for guidance before making any purchasing decisions. Investment advisory services offered through Blue Ridge Wealth Planners, a Registered Investment Advisor. Securities offered through Madison Avenue Securities, LLC (MAS), member FINRA/SIPC. MAS and Blue Ridge Wealth Planners are not affiliated companies.
Bob Fugate is a Certified Financial Planner and founder of Blue Ridge Wealth Planners (www.blueridgewealth.com). He holds life and health insurance licenses in several states and is a Chartered Financial Consultant
-
Stock Market Today: Nasdaq Spirals as Netflix Nosedives
A big earnings boom for credit card giant American Express helped the Dow notch another win.
By Karee Venema Published
-
Get These 40 Earth Day Deals and Discounts
Monday, April 22, is Earth Day. Many of your favorite retailers are celebrating with deals on sustainable products, recycling services, and more
By Kathryn Pomroy Published
-
Is 100 the New 70?
Eating well, exercising, getting plenty of sleep and managing chronic stress can help make you a SuperAger. Funding that long life requires longevity literacy.
By Phil Wright, Certified Fund Specialist Published
-
Nine Lessons to Be Learned From the Hilton Family Trust Contest
Disclaimers, good communication, post-marital agreements and more could help avoid conflict in a family after the owners of a wealthy estate pass away.
By John M. Goralka Published
-
Strategies to Optimize Your Social Security Benefits
To maximize what you can collect, it’s crucial to know when you can file, how delaying filing affects your checks and the income limit if you’re still working.
By Jason “JB” Beckett Published
-
Don’t Forget to Update Beneficiaries After a Gray Divorce
Some states automatically revoke a former spouse as a beneficiary on some accounts. Waivers can be used, too. Best not to leave it up to your state, though.
By Andrew Hatherley, CDFA®, CRPC® Published
-
What’s the Difference Between a CPA and a Tax Planner?
CPAs do the important number crunching for tax preparation and filing, but tax planners look at the big picture and come up with tax-saving strategies.
By Joe F. Schmitz Jr., CFP®, ChFC® Published
-
Charitable Remainder Trust: The Stretch IRA Alternative
The SECURE Act killed the stretch IRA, but a properly constructed charitable remainder trust can deliver similar benefits, with some caveats.
By Brandon Mather, CFP®, CEPA, ChFEBC® Published
-
Three Ways to Take Control of Your Money During Financial Literacy Month
Budgeting, building an emergency fund and taking advantage of a multitude of workplace benefits can get you on track and keep you there.
By Craig Rubino Published
-
How Did O.J. Simpson Avoid Paying the Brown and Goldman Families?
And now that he’s died, will the families of Nicole Brown Simpson and Ron Goldman be able to collect on the 1997 civil judgment?
By John M. Goralka Published