Our weekly roundup of tax-related investment strategies and news your clients may be thinking about.
Retirees who don't need the RMD from their traditional 401(k)s and IRAs can take advantage of the rule change that allows them to skip the mandatory withdrawal this year, according to Pimco consultant Tim Steffen in this Morningstar article. By taking this option, retirees may be better able to reduce their taxable income, which could also mean that they would owe less in capital gains taxes, he says. Another option is to convert some of their traditional assets into a Roth IRA, which "gives [them] kind of a double benefit: tax-free growth going forward plus smaller RMDs into the future."
Clients are advised to engage in tax planning to keep as much of their savings as they can for retirement, an expert in Kiplinger writes. To achieve tax efficiency in their retirement portfolio, clients should keep their taxable income low to minimize their capital gains taxes and avoid Medicare premium surcharges, he writes. Doing a Roth IRA conversion is another tax-efficient strategy they may consider, as it can boost their tax-free income in retirement and help their heirs minimize the tax bite on inherited assets, according to the article.
Some employers are likely to pull back their 401(k) matching contributions as a cost-cutting measure amid the current market meltdown, which could affect workers' retirement prospects, according to this CNBC article. Working clients who want to prepare for this possibility are advised to boost their savings rate now and take advantage of their employer's match while they can. Funding a high-quality IRA with low fees is another option, but there are contribution limits. Clients who have more money to save should sock it away in a 401(k), where "the tax advantages are still powerful and the contribution limit is higher,” an expert says.
The current financial crisis makes bankruptcy a high possibility for many Americans, and clients who find themselves in that situation are advised to avoid tapping their retirement savings, according to this article in Motley Fool. Although workers affected by the coronavirus outbreak can take penalty-free hardship withdrawals from 401(k)s and IRAs and can put the money back into the account to refund the tax payments, an expert says that they may not be able to do it amid the crisis. Instead of keeping cash in saving accounts, clients are advised to put the money in retirement accounts, which are protected from creditors. A Roth IRA is also an excellent place, as they can take tax-free withdrawals anytime.
Finding the revenue to make up for the shortfall remains a “manageable exercise,” regardless of the as-yet unknown impact of the coronavirus, a Boston College economist says.
Tax-smart investing is an important concept that allows clients to better manage their portfolio, writes a wealth strategist in CNBC. This means clients should hold tax-inefficient investments in retirement accounts and park their tax-efficient assets in taxable brokerage accounts, he writes, adding that those with tax-inefficient brokerage accounts should seek help from a financial advisor to use tax-loss harvesting and tax-bracket management. "Together, they can reduce the tax drag on your non-retirement portfolio, thus allowing more of your money to participate in long-term investing."
