Considerations
With a potentially higher tax environment looming, there are some provisions you should be aware of and some strategies that may benefit your wealth plan.
Roth IRA Conversion
A Roth conversion is the transfer of all or part of the balance of an existing traditional IRA to a Roth IRA. The money moved into the Roth IRA will be taxable as income in the year of the conversion; however, there could be significant savings. For example, if you wait more than five years from the date of conversion to the Roth IRA, investment earnings can be withdrawn income tax-free.
Required Minimum Distribution
If you have a traditional IRA or a retirement plan account, you must take a Required Minimum Distribution (RMD) each year starting at the age of 73. Consider increasing RMD withdrawals to leverage the current tax rates. Note: there are no RMDs for Roth IRAs.
Alternative Minimum Income Tax
When completing a tax return there are two calculations that take place: a traditional income tax liability and the Alternative Minimum Tax (AMT) liability. You will pay whichever amount is greater.
The AMT rate may be lower than your traditional income tax rate, however, it is calculated differently. One adjustment is the removal of common income tax itemized deductions such as state, local and property taxes, as well as other adjustments.
The 2017 Tax Act enacted a higher AMT exemption and raised the income threshold at which the exemption begins to phase out. As a result, this dramatically reduced the number of taxpayers impacted by the AMT (from over 5 million in 2017 to around 200,000 in 2018). With the sunset looming, you may have to pay according to AMT rates versus your income tax rate.
If you are going to experience an event that will be an AMT preference item, consider whether you can modify the timing to do so before January 1, 2026.
