Today might be the day for year-end tax planning, according to CPA and IRA expert Ed Slott.
It may already be too late to make some tax moves with clients, particularly when it comes to IRA planning, said Slott, the president of Ed Slott and Co., during a recent webinar presented by Financial Advisor and MoneyShow.
“All of this money has to leave IRAs before year’s end, and many places everyone takes the last two weeks of the year off, so it becomes a disaster at financial institutions,” Slott said. “Get these year-end transactions done. Don’t go beyond December 15.”
There is now increased urgency to take money out of traditional IRAs, he said, as their value as an estate planning tool has been drastically reduced by legislation like the SECURE Act.
Under that law, most IRA beneficiaries are now subject to a 10-year rule, meaning they must exhaust all of the assets within inherited accounts within a decade of the original account owner’s death.
If those assets were converted to a Roth account while the original owner was still alive, the inheritance can happen tax-free, said Slott.
“Have conversations about starting to do series of Roth conversions,” said Slott. “Over time you will get money out at very low rates. If you do nothing and just figure that you’re saving taxes every year, you are just putting off a problem. The only way you can get to IRA funds in retirement is to take a distribution,” and a distribution from a traditional IRA is a taxable event.
Some clients will balk at paying extra taxes to get funds out of traditional retirement accounts, said Slott, but it’s a question of “when, not if, the taxes are paid.”
Slott has long maintained that taxes are unlikely to go any lower than their current statutory rates, which means the math on Roth IRA conversions may work even for clients who expect to have lower incomes in retirement.
“How is it that you have higher income in retirement than in your best working years? Because you did no planning in all those years and built up this very large IRA,” said Slott. “Now required minimum distributions (RMDs) are higher than your working-year income, and on the deduction side, they don’t have the deductions they used to have. No deductions for contributions to 401(k)s, for example, and no more child or dependent-related deductions, no mortgage interest deductions because most retires have already paid off their mortgages.”