CD Financial July 2019

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JULY 2019



30270 Rancho Viejo Road Suite D San Juan Capistrano, CA 92675

The Tax Man Cometh


Ben Franklin once famously said, “In this world, nothing can be said to be certain except death and taxes.”Today, I want to talk about taxes. It may not be the most glamorous subject in the world, but it’s hugely impactful when it comes to analyzing your financial plans. Every decision you make should be informed by the tax policy at a given time. When you don’t account for the influence of taxes on your money, you’re missing a significant part of the picture. The Tax Cuts and Jobs Act, which took effect on Jan. 1, 2018, created historically low tax rates for millions of Americans. Most economists describe the debt situation created by the new tax policy as unsustainable. “If I had a magic wand, I would raise taxes,” former Federal Reserve Chair Janet Yellen told CNBC last year. Given how widespread opinions like Yellen’s are, it’s extremely unlikely that tax rates in a decade will be as low as they are today. Depending on who is in office at the time, tax hikes may be concentrated with the extremely wealthy or spread among the entire pool of taxpayers. Whatever an updated tax policy looks like in detail, it will almost certainly involve higher taxes for most families. What does this mean for your retirement planning? Well, it means you may benefit from paying taxes on retirement savings now rather than later. This is done through a process known as a Roth conversion. Roth retirement accounts are taxed when the money is put in, as opposed to traditional 401(k)s or IRAs that tax money when it is distributed. It’s not hard to see why you may want to pay those taxes now rather than later, especially given that you must “‘If I had a magic wand, I would raise taxes,’ former Federal Reserve Chair Janet Yellen told CNBC last year. Given how widespread opinions like Yellen’s are, it’s extremely unlikely that tax rates in a decade will be as low as they are today.”

begin distributing money when you reach the age of 70 1/2 in annual increments known as RMDs (required minimum distributions). You can withdraw more than an RMD in a given year, but never less. If that money is not in a Roth account, you will be forced to pay taxes at the given rate when you withdraw it. So, why not take control of your retirement accounts now, and take the government and state out of it later. Many clients hesitate to undergo a Roth conversion because they hate to see the money in their account lessen due to paying taxes. I like to compare it to ripping off a Band-Aid. If you remove it slowly, it will hurt the entire way. If you do it in one fell swoop, it may hurt, but you won’t be left with sticky residue that will take time and effort to scrub off. And it won’t hurt for a longer period of time, just a short quick burst. Look, anytime anyone presents a pay now or pay later scenario, the pay now scenario is almost always the best bet. Another fantastic benefit of a Roth account is that it is immunized from future tax or policy law changes. Let’s say, for example, you pass away with your money in a traditional account. All of a sudden, your spouse is now pushed into the worst tax bracket, as a single filer, as opposed to a joint filer, the most advantageous tax bracket. Most folks do not intend to do this to their spouse, as many anticipate leaving their assets to their loved ones. Yet, that effectively costs your spouse dearly, as the new tax bracket is the highest tax brackets there are for retirement accounts. On the other hand, the money in a Roth account is yours, and your inheritors, tax-free, never to be tampered with again, whether it be federal or state taxes. No matter what stage you’re in for retirement planning, including those already retired, you may benefit from a careful analysis of your portfolio to see if you will benefit from a Roth conversion. Taxes may be inevitable, but you do have some control over how they are levied. Don’t take that power for granted. There’s only a short window of opportunity left for these most favorable tax brackets.

-Charles Dzama


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