Tax Strategies

R2R - Tax Strategies

Every year we all go through all the stress of gathering our tax information in a scramble to make sure we account for all of the data needed to file our federal and state tax returns on time. And every year, amongst this frustration, we make vows to pay less in taxes and give less of our hard-earned money to Uncle Sam. The Bedell Frazier Financial Planning team has put together a list of tax-smart moves you can make this year to lower your tax bill today, in retirement, and with the ultimate goal of retaining more of your money.

Gifting Strategies:

Qualified Charitable Distributions (QCD)

One option for those charitably inclined to avoid those ordinary income taxes is to give the Required Minimum Distributions (RMD) to an eligible public charity via a Qualified Charitable Distribution (QCD). A Qualified Charitable Distribution (QCD) can be made from IRAs and IRA beneficiary accounts only, due to the IRS tax code. Each individual can donate up to a $105,000 limit, that applies to the sum of all of the QCDs taken from across all of your IRAs in a tax year. You must be over age 70.5 years old to make a QCD.

There is no need to itemize deductions on your tax return for the amounts given away via the QCDs, because the tax treatment is such that the amounts given are excluded from income. The QCDs don’t increase your Adjusted Gross Income, your taxable income, or your Medicare income-related monthly adjustment amount, they simply transfer to the charity. It is important to realize that the first dollar out of an IRA is considered to be the Required Minimum Distribution (RMD), so the timing of executing the Qualified Charitable Distributions (QCD) is critical. Contact the Bedell Frazier Financial Planning team for assistance on this topic.

Charitable Giving

Consider donations of appreciated securities held more than a year to avoid capital gains. The charitable contribution deductions are based on the fair market value of the security on the date of donation. If you are using the standard deduction on your taxes, you might not be receiving the full tax benefit of your charitable gifts. We can help with a strategy called “gift bunching.” Contact us, and we will be happy to explain.

For a more in-depth look, read our article about Charitable Giving.

Personal Gifts

In 2024, you may give away $18,000 per person ($36,000 if gift splitting with a spouse) each year tax-free and without filing any gift tax forms with the IRS. You can make unlimited direct payments for medical and tuition expenses.

Retirement Account Contributions:

Pre-Tax Savings Into Retirement Accounts

Contributing to retirement accounts is one of the best saving options to increase the probability of a successful retirement plan while at the same time lowering your current tax bill. For 2023:

Employer Plans Contributions (401k, etc.)

The maximum contribution is $23,000 or 100% of your compensation, whichever is less. If you are age 50 and older, you get a “catch-up” contribution of $7,500 for a total of $30,500. If you choose the pre-tax option for your 401k contributions, it will lower your current taxable income while socking away money for retirement growing tax-deferred until withdraw, when it will be taxed as ordinary income. If you choose the Roth component, you will pay taxes today on that contribution but will build a tax-free bucket to draw on during retirement.

Read more about Employer Sponsored Retirement Plans.

Traditional IRA

There are several tax incentives associated with Traditional Individual Retirement Accounts (IRA). If you don’t have a retirement plan through your employer like a 401(k), the contributions you make to a traditional IRA are usually tax-deductible. Note – Deductibility depends on income.

In 2024, the maximum contribution is $7,000 or 100% of your earned income, whichever is less. If you are age 50 and older, you can add a “catch-up” contribution of $1,000. A non-working individual can use their spouse’s earned income to contribute to an IRA.

Roth IRA

You could choose to make your annual IRA contribution to a Roth IRA. One of the more attractive retirement accounts available because the money grows inside the account tax-free and there are no taxes on withdrawals. There are also no required minimum distributions with a Roth IRA. There are income thresholds that limit who may contribute directly to a Roth IRA. For 2024, the Roth modified adjusted gross income (MAGI) thresholds are $146,000 to $161,000 for single filers and $230,000 to $240,000 for married couples filing jointly.

Read more about Individual Retirement Accounts.

Tax Strategies:

Roth Conversion

As a hedge against the risk of higher taxes in the future, a Roth Conversion is a strategy to consider. Higher taxes seem inevitable in an environment where the Presidential administration wants to increase spending. There is an unprecedented federal budget deficit and the expiration in 2025 of many current tax policies will occur unless action is taken.

The process for a Roth Conversions is as follows, you take a distribution from your current IRA and roll it over into a Roth account. You pay taxes on that distribution in the current tax year while creating a Roth tax-free bucket for the remainder of your lifetime (under current tax law). You can vary the amount you convert each year depending on your tax situation.

Some potential Benefits

  • Tax diversification – As you diversify your investment portfolio, you should also consider diversifying your tax liability. Many investors have a disproportionate amount of their wealth tied up in tax-deferred accounts such as traditional IRAs and 401(k).
  • No required minimum distributions (RMDs)
  • Generation planning – With no RMDs required from the account owner or spousal beneficiary, there is more time for assets to grow tax-free. When passed to the next generation, assets are withdrawn tax-free and the account must be emptied in 10 years or less under current law.

While the conversion can be done anytime, there may be a window of opportunity when you are in a lower-income tax year. The most common are when you are between jobs or after retirement and before you start RMDs.

Since this increases your Adjusted Gross Income, be aware that there could be a one-time impact on your Medicare premiums, tax deductions and other calculations that are tied to Adjusted Gross Income. This is offset by many years of tax-free growth and the benefits for the next generation.

Back Door Roth

This is a popular financial planning tool that allows those whose incomes exceed certain thresholds to still get money into a Roth IRA on an annual basis. The process for a backdoor Roth IRA is fairly simple, you contribute after-tax dollars to a regular contributory IRA (no tax deduction) and then convert those dollars into a Roth IRA. The conversion of the contribution will be tax-free if you have no other Traditional IRA accounts. This seems to be on Washington legislators chopping block every year; only a matter of time before they take it away. In 2024, it is still here as a great planning tool.

Education Saving Strategies:

529 Accounts

Can be a great way to save for education spending for your children or grandchildren. The growth of the investments in a 529 account is tax-free if used for qualified education expenses. The contribution is considered a personal gift with the $18,000 per person ($36,000 if splitting with spouse) annual exclusion, which must be completed by year-end.

A 529 plan also allows a donor to make five years of donations lumped into one $90,000 contribution as long as no other gifts are made to the same beneficiary for the next 5 years. This can be a good estate planning tool as the $90,000 is outside of the donor’s estate, but they still are in control of the assets. The 529 plan is an investment account that lets the donor control the funds while keeping them in their own name. With few exceptions, the named beneficiary has no legal rights to the funds, unlike a UGMA/UTMA where the child takes control of the assets once they reach legal age. If the child named beneficiary chooses not to go to college, you can repurpose the money or…

​​529 College Savings Plan to Roth IRA Rollovers

This is an exciting new financial planning tool when the SECURE Act 2.0 bill was passed in December of 2022 with the ability to allow tax and penalty-free rollover from a 529 college savings plan to Roth IRA, with limitations. The beneficiary (child) of the 529 college savings account, which must have been opened for 15 years, must move the funds to a Roth IRA in their name. The lifetime rollover limit is $35,000 of unused 529 college funds to the Roth IRA. Income limits don’t apply as they do for regular Roth contributions.

Read more about Education Savings Accounts or College Financial Planning with College Savings Analysis.

Contact the Bedell Frazier Financial Planning Team today for assistance or any questions you have on these tax-saving ideas. We can model a college calculator which will show you if you are on track for college education savings for different schools with just a handful of data points. If you have a retirement plan with us, we can model both Qualified Charitable Distributions (QCD) and Roth Conversions in our Financial Planning software. If you don’t have a financial plan, contact us today to get one started.

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