Planning opportunities around potential tax increases and retirement account changes
As summarized above, there are possible income tax increases and retirement account changes on the horizon. While the proposals are still only draft legislation at this stage, it’s worth at least having these items on your radar in case they do make their way into law.
Here are my thoughts on possible planning opportunities:
- Increase in the top marginal income tax rate – If you’ll be impacted by this, see if you have any future sources of income that you’d be able to pull forward into this year while you’ll still be under the current/lower tax rate.
- Increase in the top long-term capital gains tax rate – I frankly don’t see anything that can be done about this. As proposed, the higher rate would retroactively go into effect for any sales entered into on September 14, 2021, or later.
- Roth conversions no longer allowed after 2031 for high income people – This is another topic where I don’t know there is any good action to take to try. If you’re high income, you may think it would be good to try to get in more conversions than you otherwise planned on doing over the next 10 years. However, if this new restriction is going to apply to you, it means you’re already in the highest tax bracket. Therefore, doing conversions now may not actually be the best long-term play, because your taxes may potentially be lower in the future.
- Backdoor Roth IRA contributions no longer allowed for anyone – Here’s another one without many obvious planning opportunities. If you were already planning on doing a backdoor Roth IRA contribution this year, this shouldn’t change your plans. Regardless, you won’t be able to do backdoor contributions at all starting next year.
- RMDs for high income people with retirement accounts > $10,000,000 – I suspect most of you reading this won’t actually be impacted by this provision; having more than $10,000,000 across retirement accounts is quite uncommon. But if you will happen to be impacted, perhaps consider reallocating some of your investments to put the lower growth assets in your tax-deferred accounts and the higher growth assets in your Roth or normal taxable accounts. That way, you can try to minimize the growth that will be subject to taxation when the RMDs begin.