Contributors: Ben Reynolds, Bruce Ensrud

In a perfect world, smiles would be a great currency! In the meantime, here are a few timely opportunities to consider as we approach tax season.

Opportunity 1: Contribute to a Roth IRA or Traditional IRA.

If you had earned income in 2020 (less than $196,000 if Married, less than $124,000 if Single) and currently have excess cash on hand, consider contributing up to $6,000 ($7,000 if age 50 or older) into either a Roth IRA or Traditional IRA. You still have time (up until April 15) to make 2020 year contributions. If you have a clear line of sight on your 2021 income already, you could consider making a contribution for 2021, too.

Opportunity 2: Take advantage of a Health Savings Account (HSA).

If you’re covered by a qualifying High-Deductible Health Insurance Plan (HDHP), this can be a terrific opportunity. HSAs are extremely tax efficient:

  1. Contributions are tax-deductible (lowering your tax liability today)
  2. Your HSA balance grows tax-deferred (lowering your annual tax liability)
  3. Qualifying distributions are tax-free.

Typically HSAs are funded via payroll deferral, but you can make lump-sum contributions up to the annual maximum. If you made/make Tax Year 2020 contributions, please make sure to make alert your tax advisor so they can factor this into your tax return.

  • Annual Max for Tax Year 2020 (contribution deadline is May 17 this year):
    • Self-Only Plan: $3,550
    • Family Plan Contribution: $7,100
    • Note: If you’re age 55 or older, your contribution maximum increases by $1,000.
  • Annual Max for Tax Year 2021:
    • Self-Only Plan: $3,600
    • Family Plan: $7,200
    • Note: If you’re age 55 or older, your contribution maximum increases by $1,000.

Opportunity 3: 401(k) Deferral – Pre-Tax vs. Roth Deferrals

It’s an age-old question: is pre-tax or Roth better?

Pre-Tax contributions avoid taxation when the contribution is made, but you pay taxes in the future upon distribution. Opposite, Roth contributions are taxed when a contribution is made, but future distributions are tax-free.

So really it becomes a strategy of when your tax rate will be lower. If you feel tax rates are going to be higher for you in the future, it’s more advantageous to pay the taxes today while rates are lower by contributing to a Roth 401(k). Conversely, if you feel tax rates are going to be lower for you in the future, take your tax deduction today and contribute to a Pre-Tax 401(k).

Opportunity 4: Charitable Giving

Charitable giving can be a triple win – it helps non-profits, communities at-large, and can even improve tax efficiencies for individuals who gift certain assets.  Rather than gifting cash (by simply writing a check from your bank account), consider the following options to tax-efficiently fulfill your charitable intent:

  1. Highly Appreciated Non-Qualified Assets: By gifting Non-Qualified Assets, individuals avoid realizing gains on appreciated assets. Additionally, qualifying nonprofit organizations do not pay taxes on the gifted dollars either, making the gift tax-efficient for both parties. After the gift is made, you could use the cash that you would have otherwise gifted to fulfill your gifting intent to rebuy the gifted assets. This can retain your exposure to the asset, but increase your cost basis.
  2. Qualified Charitable Distribution (QCD): This applies if you’re age 70 or older and have Traditional IRA (or SEP IRA or SIMPLE IRA) assets. Through this QCD process, you can gift dollars directly from your Traditional IRA to your desired nonprofit. The benefit of this process is that you avoid realizing the dollars as taxable income, and QCDs count towards your Required Minimum Distribution (RMD). So, if you do not need your RMD to meet income needs and have charitable intent, this can be a win-win!

Opportunity 5: Roth Conversions

Those with Traditional IRA (or SEP IRA or SIMPLE IRA) assets: if your 2021 income will be lower than previous years and/or lower than future expectations, you may want to consider a Roth Conversion. The goal of this strategy is to convert Traditional IRA assets (which are taxable in the future) to Roth IRA assets (which are tax-free in the future) when your tax rate is relatively low. While this strategy will generate additional tax liability in the current year – the idea is that you’re generating this at relatively low tax rates and all future growth on the converted amount will be tax-free in the future.

The good news: Roth conversions can happen at any time throughout the year.   

With a Smile

We hope these opportunities give you something to think and smile about. We enjoy helping clients be strategic, so please reach out if you’d like to discuss your specific scenario.

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