Tax Planning for 2021

February 1, 2021

With 2020’s tax season quickly approaching, we’re seeing people who are already planning their tax strategy for 2021. While there are always hurdles and stresses with tax planning, one of the biggest things that we have to contend with is what we pay Uncle Sam.

With a new administration and President Biden leading the way, we will be looking to him to rebuild or restructure the tax plan in any way that he chooses to do and there’s a number of things that he’s proposing. In full transparency, it seems like a lot of it tends to focus more on people making $400K or more per year. If you’re in that tax bracket, you definitely need to be paying attention to what’s going on with the tax laws, how they’re changing, and what you can do to limit the amount that you’re paying in.

At the time this was written, nothing has been finalized or approved and most of his plan is still speculative as to what will be put into play. While it is not finalized, I think it is important enough to at least bring up so you can start talking and thinking about it.

Right now everybody’s getting organized for 2020’s taxes. You are getting your W-2s & 1099s in the mail and gathering all the information you need to either take to your accountant or to sit down and do them yourself. If you haven’t already, I would encourage you to start thinking about how much you are actually paying to Uncle Sam and ask yourself if there is a way that you could start to minimize that.

It is important enough to spend a few hundred dollars (or whatever it is) to hire a good tax person to really make sure that you are not missing anything. I talk about it on the show almost every week and it’s those really small hinges that swing the big doors in retirement. You’ve got to make sure that as you’re building out your retirement plan and structuring everything, you aren’t missing anything. Especially on the tax side! Taxes are going to be the biggest obligation that you’re going to have to pay out of your retirement funds.

If you are a do-it-yourself-er and managing your own investments, you are not paying anybody to manage anything. Think about how much you are potentially giving away to Uncle Sam out of your 401ks or IRAs. Those are the types of accounts that most of us have used for our accumulation phase of life to save money because they gave us a tax deduction. Now we are starting to look at it and say, OK, well, how do we get this money out?

I was asked the other day about my thoughts on Roth IRA conversions for 2021. From my point of view, we know what the tax brackets are right now. 10% being the start of the brackets all the way up to 37%. What we do not know is what they are going to be 10 years from now. If you look at it from that perspective, it is probably in our best interest to consider going ahead and doing some conversions and making some tax changes.

I suppose they could be lower in the future and we could end up kicking ourselves for paying the higher tax bracket, but I think right now we have to consider what has been going on in the world over the last year. All of the stimulus money that has been added to the debt on top of where we are as a country, we are probably better off going ahead and paying that tax now.

If you have not sat down with your advisor to talk about Roth conversions and you want to talk to us about it, we are more than happy to answer any questions you might have and help you map out a strategy. This strategy is a major part of our Retirement360 Bundle and we like to call it a “Tax Map.”

We also plug in things like what if you converted fifty thousand dollars from an IRA to a Roth IRA this year, how does that change your taxes? What does it mean for you to make that kind of move? The other thing we look at are the contributions that you are investing in your 401k. Now, if you are in the last couple of years of work, maybe taking those contributions and switching them over to the Roth conversion makes sense for your situation. Keep in mind, a lot of the companies that offer the 401k Roth versions might not match in your Roth account.

I also recorded a video over this topic, and you can watch that by clicking here.

Alan Mercurio