You have seven more years to potentially save yourself a lot of money in taxes
As you know, the “Tax Cuts and Jobs Act,” changed the income tax rates and tax brackets for individuals starting with the 2018 tax year. What you may not know is that the changes for individuals are temporary and will expire in 2025, meaning that for the 2026 tax year, they will revert back to 2017 levels. You need to act now in order to potentially take advantage of current lower rates.
THE MYTH OF THE LOWER TAX BRACKET IN RETIREMENT
Taxable ordinary income is all income subject to the individual income tax rate. While many retirees think they will be in lower tax brackets in retirement, often this just isn’t true. Why? Because of RMDs.
RMDs (Required Minimum Distributions) are mandated by the IRS to be withdrawn every year from your qualified, tax-deferred accounts like traditional IRAs and 401(k)s starting at age 70-1/2. These are often the largest retirement savings accounts many people own. The RMD percentage which has to be taken out—whether you need the income or not—increases as you get older, which can cause some people to pay a lot more income tax than they ever expected. They sometimes find that their Social Security benefits also are taxed at that income level—as much as 85% of benefits may be taxed!
ADVANCE TAX PLANNING CAN SAVE YOU THOUSANDS OF DOLLARS
Just look at the rates for the bracket themselves, what they are now versus what they will be again in 2026, when they will return to 2017 levels. If you are a married couple with yearly ordinary income of $150,000, going from a 24% rate to a 28% bracket—a 4% jump—will cost you an additional $6,000 yearly paid to Uncle Sam if you do nothing. If your spouse passes away and you’re single by that time and still drawing the same income, you will go from a married rate of 24% to a single rate of 33%—a 9% increase—or $13,500 annually.
ROTH CONVERSIONS ARE BEST DONE OVER A PERIOD OF SEVERAL YEARS
The time is now to see if Roth conversions while tax rates are low make sense for your individual situation in order to save money for the long term. Roth conversions, done over a period of several years, can allow you to roll taxable money into tax-free Roth IRA accounts—which also transfer to your heirs tax-free in most cases.
Let’s plan ahead, because now is the perfect window before tax rates go up again in 2026. We can run all the calculations to see how best to do conversions within your current tax brackets to help optimize your tax savings.
Call us at Eric Scott Financial, 435.773.9444, to set up an appointment.