A tax time bomb could be awaiting you in retirement unless you implement strategies now to defuse it. Understand how strategies like Roth conversions, tax loss harvesting, net unrealized appreciation, donor-advised funds and more can help you reduce your tax liability as you plan for a successful retirement. Plus, learn how recent tax legislation called the SECURE Act 2.0 impacts you, your family, and your retirement savings. Pure Financial Advisors’ Tax Planning Manager, Amanda Cook, CPA, JD explains how to take advantage of the available tax-saving opportunities, and she answers audience tax questions.
- 00:00 – Intro
- 02:32 – Tax Basics: Tax Terms
- Gross Income, Adjustments
- Adjusted Gross Income (AGI)
- Standard Deductions, Itemized Deductions
- Taxable Income, Tax Credit
- 10:25 – The Tax Time Bomb
- 2023 Taxable Income Rates, Capital Gains Rates
- Tax Diversification Strategies: Taxable, Tax-Deferred, and Tax-Free Savings
- Filling Up the Tax Bracket
- When Not to Do a Roth Conversion
- 31:19 – Tax Planning Tips
- Tax Loss Harvesting
- Backdoor Roth IRA
- Net Unrealized Appreciation
- Charitable Gifting Strategies: Donor-Advised Fund
- Tax Deadlines
- 52:01 – SECURE Act 2.0
- More Roth Options: Early Withdrawal, RMD Changes
- 2024 and Beyond: Roth RMDs, Catch-Up Contribution Changes
- What is best way to avoid the tax torpedo of 49% when taking Social Security and RMDs? When you get around the 22% tax bracket the taxes go up on Social Security.
- For Roth conversion income limits, is the income limit before or after the standard deduction?
- How does a home sale affect your tax bracket in the year of the sale, assuming single status, capital gain less than 250k, and lived in the home more than 2 years?
- Is there any tax strategy regarding selling stocks/ETFs at a loss in a Roth IRA? That is, is there anything like tax loss harvesting inside a Roth IRA?
- What is the added deduction amount for over 65 years of age?
- Please discuss treatment of capital losses – I wrote off a $75k investment last year
- Does a Roth have an RMD?
- Does the conversion have to be done in the calendar year (by 12/31) or by 4/15 of the tax filing year?
- What makes Social Security go from non-taxable to taxable?
- Isn’t it better to roll over a full amount from a 401(k)/IRA to a Roth IRA and pay taxes due outside of the IRA?
- Do we need to pay taxes on the Roth conversion in the quarter in which we do the Roth conversion, and what percentage of estimated tax is required? If so, is there a form we need to submit to the IRS or State for that quarter?
- My accountant said quarterly taxes this year are not due until October. Is this correct?
- What are the future brackets for tax rates in 2026? i.e. For current Married Joint filers the 22% bracket starts at $89,000 – but where does the new 25% bracket start in 2026?
ANDI: Now, please welcome her, Amanda Cook, CPA. Amanda, thank you so much for being here today. I know there’s a whole bunch about tax planning that we all need to know.
AMANDA: Hi. Yeah, thanks so much for having me. It’s an exciting tax season, so I’m excited to get into some of the nitty gritty on- on things that people really need to know.
ANDI: Absolutely. And as a reminder, if you do have any questions as Amanda is going through this today, just go ahead and type those into the Q&A. And I will, if you- if you’re good with it, I will just interrupt you as necessary to get- get you those questions.
AMANDA: That’s great.
ANDI: All right, sounds good.
AMANDA: All right. So as we mentioned, there’s a lot to go through today, so let’s just kind of dive right in. Just to give a little bit of a historical perspective on where we’re at in terms of the history of tax, this chart shows what the highest marginal tax bracket has been over the course of time since we’ve had an income tax. So you can see it started off fairly low. You know, we- we sort of tested the waters on having an income tax and then we spiked it up very high, to support both World War I and then World War II, and it pretty much stayed there. It’s been somewhat steadily coming down. Then in the Reagan years, we really took a dive down. This is where the sort of idea of, trickle-down economics came into play. The top marginal rate decreased significantly until the 90s. And then ever since then there’s been sort of some ideas about raising it, bringing it back down, raising it, bringing it back down, depending on what’s been going on in the overall economy. But you can see that our- our top marginal rates are relatively low. So a lot of times when we’re thinking about whether or not taxes are gonna go up or down in the future, we often look at this history and think there’s definitely a lot of room for them to go up. So with that in mind, I kind of wanna go through some of the tax basics, just so that we have the terminology really, really settled, as we go through some of the more, complex ideas. Like what the tax time bomb is, how to diffuse it, what strategies are available to you, depending on what kind of a tax situation that you’re in. And some of the more recent changes that have come about in SECURE 2.0. So starting off with just the basics, the first thing that you need to know is that your gross income is all of your income. The IRS defines it as, income from whatever source derived. It includes income that’s not in cash, income that’s not reported on a form. You know, really anytime that you receive money or anything of value, you should be thinking about if it’s taxable or not. And the default answer is, yes, it is taxable unless it’s specifically exempt. So all of your income gets included to determine what is your gross income. Then the next section on your tax return are the adjustments to your gross income. These are gonna be items that are subtracted. A lot of times they used to be called above the line deductions because there used to be a line on the form and these were above it. Now, with all the- the new iterations on the tax forms, that moniker doesn’t make as much sense. But- but having these as subtractions from your gross income brings us to adjusted gross income. So that makes sense. Those adjustments, the most common ones that you’re gonna see really relate to self-employment. So they’ll be self- 1/2 of your self-employment tax, self-employed health insurance, or self-employed retirement plan contributions. Those are 3 of the big ones. Another really common adjustment is the educator expense adjustment. So if you’re a teacher, you can deduct up to $300 that you spend of your own money for classroom supplies and things like that. Also traditional IRA deductions are adjustments. And if you have an older divorce agreement where you have deductible alimony, that will also be an adjustment. So those are the most common things that we see reduced gross income to AGI. This number is used as a phase-out or a phase-in for most other things on the tax return. So when you’re thinking about are you eligible to contribute to a Roth IRA, for example, are you eligible for premium tax credit? How much of your medical expenses will be deductible? All of these types of questions are pegged to this number here. Occasionally this number will be modified. And then it will be called a modified AGI or MAGI. But- but this is one of the most important numbers on your tax return. After you’ve established what your AGI is, the next step is to determine what are your below the line deductions. So everybody gets the benefit of a standard deduction, whether or not you pay anything that’s deductible, you still get the benefit of this. So for 2023, these numbers are $13,850 for a single or married filing separately, there’s a little bit of a caveat. If you’re married, filing separately. If your spouse itemizes, you also have to itemize. Your, standard will be $0. Married, filing joint or qualifying widower is double. So $27,700. And then head of household is $20,800. There’s also an addition of $1500 if you’re over age 65 or blind or both for each you and your spouse. You get the standard deduction whether or not you pay anything that’s deductible. So when you- if you have, deductible expenses that are less than the standard deduction, you’ll usually still claim the standard. If your deductible expenses are more than the standard deduction, then you might benefit from itemizing your deductions. Also, depending on the state, some states favor itemizing deductions, even if you could claim the standard because you have to do the same for federal and state purposes. California allows you to pick standard for federal and itemized for the state. That’s where we are. But these itemized deductions include state and local income tax, and property tax, and personal property tax, like your vehicle registration. That’s limited to $10,000. You may also deduct your mortgage interest on up to $750,000 of mortgage debt. Or if you have grandfathered debt, then- then that may be a little bit higher. You can claim medical expenses that are over 7.5% of your AGI. And you can claim charitable donations, depending on the type of the charity and the type of the donation. The- the amount that’s deductible will be somewhere between, usually about 30% of AGI and 60% of AGI. There are some instances where it would be 20% or 100%. Those are much more rare. For most people, it’s either gonna be 30%, 50%, or 60% of AGI limit. Because all of these are limited and because the standard deduction is so high, fewer and fewer people itemize every year. So there’s some strategies that you’ll wanna make sure that you’re aware of with regard to itemized deductions if you’re close to itemizing. We’ll talk about a lot of those, particularly with charity, later. Once you take the deductions off of your adjusted gross income, what you’re left with is your taxable income. This is the number where your tax is actually determined. So for most people with ordinary income, you can take the number from the- the tax return that says taxable income and just look it up in the instructions and figure out exactly what your tax will be. If you have income that’s taxed in other ways, like capital gains, qualified dividends, income like that, that’s got a different tax rate associated with it, there will be a separate worksheet. But this will still get you pretty close to understanding what your overall tax burden is gonna be and what tax bracket are you in. From there, if you are eligible for any credits, you can reduce that tax on a dollar-for-dollar basis. So the most common credits are child tax credit, child independent care credit, earned income credit if you’re relatively low income. And these just come off dollar-for-dollar. Some of the more popular credits right now are the solar credit and the clean vehicle credit because with the Inflation Reduction Act last year, those were expanded and increased. Regulations are pending on the clean vehicle credit. So there may be some- some changes to what vehicles qualify, but right now it’s allowed vehicles that previously didn’t qualify to qualify. All right, let’s talk about the tax time bomb. So, once you’ve looked at your taxable income from your tax return and you’ve determined what tax bracket you’re in, then the next thing that you’ll really wanna understand is, what is your future tax bracket going to be? So do you expect over the course of your life that your income is gonna go up or down? Most people, when they think about it, think in the future their income is gonna be less because they’re not gonna be working. But what we find is that people who have done a really good job saving, and particularly if they have any other fixed income resources like a pension, also including Social Security, that their taxable income will actually be higher in the future. So, additionally, in 2026, tax rates are already slated to go up. So for the most part, if you’re in the 10% tax bracket, even if your income stayed the same, you would still be 10%. But already in the 12%, you would be going up to 15%, 22% to 25% and so forth along this chart. So it’s really important, particularly if you’re in these 22%, 24% brackets, both of these levels are projected to be below what the future tax rates are gonna be for this income. And this is really where most middle income people fall. You can see the- the tax chart here. So as I mentioned, 22% to 24%, this is taxable income between about $45,000 and $182,000 for a single person or between about $90,000 and $364,000 for married. So again, you know, those are really common tax brackets. 22% will eventually go up to 25%. So it’s gonna, you know, leapfrog the 24% and then 24% will go to 28%. That’s- that’s where we find most of our clients. The capital gains rates are 0%, 15%, and 20%. There’s also what’s called a net investment income tax. This came from the Affordable Care Act, also called Obamacare. It’s a 3.8% tax on investment income for people who make $200,000 or more, unless they’re married, filing jointly, in which case it’s $250,000. Then investment income is subject to this additional tax. So that happens, kind of in the middle of the 15% tax bracket. So what we really see is that it’ll be 0%, 15%, 18.8% and 23.8%. This bracket is on top of your- your regular tax, and this is where if you have capital gains income, you will- you’ll have a worksheet that determines what your tax is. It won’t be purely based on your taxable income. So I think Andi has a question?
ANDI: Yeah. couple of questions just before you jump into this part. “What is the best way to avoid the tax torpedo of 49% when taking Social Security and RMDs?”
AMANDA: The tax torpedo of 49%? Is that-
ANDI: That’s the question. Yes, when taking Social Security and RMDs.
AMANDA: Do you think that this is relating to taking RMDs and then the Social Security becomes taxable?
ANDI: It could be. If our anonymous attendee can fill us in with more details on what you’re referring to with the 49%, that would be great. The next question is “For Roth conversion income limits is the income limit before or after the standard deduction?”
AMANDA: It’s before the standard deduction. So the income limit is based on adjusted gross income, AGI.
ANDI: And then “How does the sale of a home affect your tax bracket in the year of the sale? Assuming single status and capital gain less than $250,000 and lived in the home for more than two years?” We can hold that one until the end if you prefer.
AMANDA: It’s actually pretty straightforward, it really doesn’t. When you- when you qualify for the 121 exclusion, which is that you’ve lived in the home for two years, you’ve owned the home for two years and you haven’t excluded the gain from another home in the last two years, you can exclude up to $250,000 as a single person. And- and at that point you don’t actually don’t even have to report it on your tax return unless you have a 1099S. And then if you have the 1099S, you report it. Basically, you just zero out the whole transaction and- and it doesn’t affect your income or your AGI.
ANDI: Excellent. Thank you for that. If you do have questions, go ahead and type ’em into the Q&A right now and we will wait, to get, more information from that anonymous attendee and then it’s back to you.
AMANDA: All right. That sounds great. You know, we’re gonna talk about tax diversification right now, and this is, where you actually have some control over what your taxes are gonna be in the future. And if I’m right, I think this might address the torpedo question also. So if we start with- with what happens when you’re saving, right? You’re working your job, you’re trying to save for retirement, you’re looking forward to the day when you can finally retired like I am. And you’re thinking about how do you wanna put your funds throughout your life? You have 3 basic pools that you can use. The first one is, is this pool right here. This is mostly your Roth account. They can be Roth IRAs or Roth 401(k)s. You pay tax on this when you put the money in, right? So you’re- you’re paying tax on the money and then you’re putting full dollars into this account. Another alternative outside of a retirement account is our taxable pool. In this case, same thing, you pay tax on the money first, and then whatever you have left is what you can invest. That creates basis in the account. These are your brokerage accounts, by the way. So stocks, for the most part, it creates basis. Your basis is no tax. But your gains are taxable. That’s why we call it the- the taxable account. And then the- the final option is the most common and the most traditional option, this is your 401(k), your traditional IRA, 403(b), and other non-Roth, pre-tax employer plan. In these cases, you pay no tax when you put the money in and then this money grows and- and you say you can take it out for retirement. So once you transition to retirement and you start thinking about how are you gonna take this money out, now it’s the almost the opposite, right? So this money comes out tax-free. This money will come out at the- at the capital gains rate. So that’s what we were just talking about where there’s sort of a different set of tax brackets that applies. So could be 0%, 15%, and with the net investment income tax, 18.3% and 20.3%. And then there’s these which are ordinary income. That’s the- the traditional tax brackets that we were showing earlier. So 10%, 12%, 22%, 24%. In 2026, those are intended to go up to 10%, 15%, 25%, 28%, and so forth. The maximum bracket right now is 37%. It will be 39.6% in 2026. If you’re watching the news and you’re trying to think, you know, how likely is it that this is really gonna happen in 2026? It seems like those top brackets, the 37% going to 39.6%, 35% staying the same, and 32% going to 33%, that’s really a target, for- for Congress. But below that, the income is more in that below $400,000 or below $250,000, those are sort of the thresholds that many politicians say they don’t wanna raise taxes. So we’ll see what happens in the- in the 22%, 25%, kind of brackets there, but right now they’re expected to go up. Also, this is your highest tax rate in any given year. So, one thing that you wanna consider is, are you saving by doing pre-tax enough money to justify paying ordinary income tax rates on not only this money, but also the growth? So here all- everything that’s in here is taxable. I usually just kind of, thinking about it in a very simple way. I usually think, you know, it’s about 1/3 for- for federal taxes and, you know, another 10% or so for the state. So this is all gonna go to tax when you think about this balance. Over here, if you saved that money outside of a pre-tax account, you would just have about, you know, a portion of your gains that would go to taxes. And then up here, nothing will ever go to taxes, right? This will be- once the money goes in there, the taxes have already been paid. All of the growth also comes out tax-free, as long as it’s a qualified distribution. So one thing that happens is when we think about what’s coming out as ordinary income in retirement, we have Social Security income, pensions and also the accounts that I already listed. Social Security is taxable between 0% and 85% depending on what your other income is. And I think what might have been the question previously is if you, once you start taking RMDs, now you have additional income and that makes more of your- your Social Security taxable and you end up effectively paying double tax, right? So then it’s even more of this account that’s going to tax. The best way to avoid that or to limit your exposure to that is to really work on controlling your RMDs. So what are RMDs? Right? These are required minimum distributions after you reach a certain age. For most people at this point, it’s gonna be age 72. If you haven’t reached RMDs yet, it’s gonna be either age 73 or age 75. Once you reach this age, you have to start taking money out of this account on a predetermined schedule that- that the IRS has created based on your life expectancy. So you- you no longer have control over when you take this money out or what happens to the taxation on the rest of your income, including your Social Security, but also your capital gains if you have any. This, which bracket you’re in here depends on which bracket you’re in for ordinary income purposes as well. Do you have a question, Andi?
ANDI: I just, number one, I wanted to confirm that yes, the person actually, posted into the Q&A and said, “when you get around 22% tax bracket, the taxes go up on Social Security.” But then I also did have a question- a couple of questions. Somebody said, “Is there any tax strategy regarding selling stocks or ETFs at a loss in a Roth IRA? That is, is there anything like tax loss harvesting inside a Roth?”
AMANDA: There’s not. One of the advantages of both these accounts, these pre-tax accounts and also these accounts, is these are considered qualified accounts and what they’re qualified for is- is tax-free growth. So during the time that the funds are in that account, any transactions that happen inside of there are not taxable. So there’s no capital gains, no capital losses, no dividends, no interest. There’s nothing really to pay- to pay on an annual basis. This is in contrast to the taxable account, which has the capital gains treatment in most cases. That account every year when you receive interest dividends, make trades, those things are gonna be taxable to you. And so that’s- that’s kind of a big difference between a retirement account and a non-retirement account, or qualified in a non-qualified account.
ANDI: And then somebody asks, “Could you please repeat the added deduction amount for people over 65 years of age?”
AMANDA: It’s- it varies depending on your filing status, I think, but I’m pretty sure it’s $1500.
ANDI: Okay. And then somebody says, “Please discuss treatment of capital losses. I wrote off $75,000 of investment last year.”
AMANDA: Okay. Yeah, for sure. We’re definitely gonna get to capital losses. Just a, a really quick summary of it is, you can offset capital gains plus $3000 of your ordinary income in the year that you realize a bunch of losses. The rest of your losses carry forward until they either offset more of your ordinary income, $3000 at a time or more capital gains.
ANDI: And then one more question. “Does Roth have an RMD?”
AMANDA: Roth IRAs do not have an RMD unless they’re inherited. And Roth 401(k)s do have an RMD, but that’s going away either next year or the year after, under SECURE 2.0.
ANDI: And we’ll be getting into that, in a little bit. But in the meantime, back to you. Thank you.
AMANDA: Okay, great. So these are really great questions. I can tell that, you know, you guys are really understanding the- the dynamics of these three triangles and how they can impact your taxes on an annual basis, right? So understanding where your funds are is gonna determine what ultimately the tax strategies are that you wanna use. And also understanding where you expect your taxes to be in the future will help you to determine, you know, what kind of a balance do you want in each kind of account. So one of the- the big strategies that we use, actually, I’ll go back to one screen, is called a Roth conversion. That’s where you move money from this pre-tax account to the Roth account. That way each year you can decide what makes sense. You pay the tax and then the funds grow up here tax-free for forevermore, right? So you can decide when and if it makes sense to pay the tax. This is especially valuable if you’re nearing retirement and you’re gonna have a few years of like very low income, especially if you haven’t started collecting Social Security yet. You have, you know, sort of a few years where you’re just gonna live on your savings, you can use those years to pay relatively low tax on your ordinary income, and do conversions. So, you know, let’s talk about, when does that make sense? One of the things that we’ll often think about is where- what tax bracket are you currently in, and how much room do you have in that bracket? So each bracket gets filled up as you go along the income ladder. So if you’re in the 22% tax bracket we’ll say, you actually pay all of the 10% tax and then you pay all of the 12% tax, and then you pay only 22% on that marginal amount that’s over the 12% limit. So sometimes it makes sense to go ahead and fill this bucket up just to get to the top of your current tax bracket without going into the 24%. You’ll wanna do this if you think your required minimum distributions, your RMDs, are gonna push you into the 24% or going forward into the 28% tax bracket. It doesn’t necessarily make sense to do a Roth conversion if you are in the 0% capital gains rate because it’s gonna make, not only the conversion will be taxable, but also it will make some of your capital gains taxable. This is also true when you have Social Security, then, you know, depending on how big of a problem your RMDs are, it might not make as much sense to do conversions if it turns your Social Security from non-taxable to taxable. Also if it’s gonna phase you out of a qualified business income deduction, you might not wanna do a Roth conversion in that particular year. Maybe wait to a year when you have somewhat lower business income. Income related monthly adjustment amounts, IRMAA. This is based on your modified AGI. This is what determines what your Medicare premiums are. So if you’re age 63 or older, this is something that you’ll really wanna consider for- for Medicare premiums. At age 65, when you enroll, they use your income from two years ago. So that’s why you wanna start thinking about this at age 63. And it’s the modified AGI is AGI from your tax return plus tax exempt interest. The other thing that you’ll wanna understand is, the pro rata rules. So often people are- are instructed to do what’s called a backdoor Roth IRA. They’ll contribute non-deductible money into a traditional IRA and then convert it to a Roth. If you already have money in a traditional IRA, then only a small portion will come out tax-free. The distributions are pro rata of your basis, which is your after-tax money and your pre-tax money. So, it’s just really important to understand if you have basis in any of your pre-tax accounts, whether that’s an after-tax amount, or basis in a traditional IRA, that amount is gonna come out in little portions based on the full value of the account. So, speaking of tax planning, we’re just about to get into tax loss harvesting, but it looks like we have another question.
ANDI: We do, we have another person that says, “Does the conversion have to be done in the calendar year by 12-31, or by 4-15 of the tax filing year?”
AMANDA: Yeah, that’s a really great question. A lot of people kind of get turned around on this because, 4-15 is typically the deadline for IRA contributions and for Roth IRA contributions. So it’s, you know, it’s very easy to think like, oh, I’m- I’m making a contribution for this year, and then I’m immediately converting it. I’m gonna report them both on the same tax return. But actually your conversion, there’s no deadline. You can do a conversion anytime that you want to, and then it’s reported for the calendar year in which it happens. So if you wanted to report it for 2022, it would have had to have been done by December 31, 2022.
ANDI: “What makes Social Security go from non-taxable to taxable?”
AMANDA: It’s based on your other income. So this is a calculation that really hasn’t changed in a very long time. I, for as long as my career has been going on, it’s been basically the same. So we start with 1/2 of your Social Security income, and then we add whatever other income that you have that you’ll claim on your tax return. And if you’re single and it’s over $25,000, or if you’re married and it’s over $32,000, or if you’re married filing separately and you live with your spouse and it’s anything over $0, then it’s gonna start making your Social Security taxable. It starts at 50% of the amount that’s over that calculation, and it eventually goes to 85%. The most of your Social Security that will be taxable is 85%. But you can imagine, you know, we’re at a point now with inflation adjustments over the course of the last, you know, 20 plus years, at least that this has been the, the calculation where even half of your Social Security might be $32,000 for a married couple or $20,000, close to $25,000 for a single person. So getting pushed into that taxable Social Security is usually a really tight window, especially if you’ve been earning high- high amounts throughout your life.
ANDI: So if you are not like Amanda and do not have a tax planning encyclopedia in your head, go ahead and download that tax planning checklist, the guide that I put into the chat. If you still need that, go ahead and put a message in the Q&A. And for the person who asked whether or not this presentation will be available for download or viewing afterwards, the answer is yes. You wanna check your email in the next couple of days, we will be making that available for replay and you will be notified when that happens. If you have more questions, go ahead and put ’em into the Q&A. Back to you.
AMANDA: Great. All right, so going into tax loss harvesting, what is this? Right? This is what we do when- when you have an account and- and you have losses and you wanna stay invested in the market, but you- you also wanna realize those losses. So, the way tax loss harvesting works is that there’s actually an IRS rule that says that you’re- you’re not allowed to do it. If you sell, a security and then you repurchase that security within 30 days, your loss is not allowed. So what harvesting does is it says, okay, I’m gonna, I’m gonna buy- or I’m gonna sell my- my stock that’s at a loss and then I’m gonna purchase something that is similar, or highly correlated with that original investment so that I can stay in the market within that 30 days. I don’t get kicked out. So if there’s any upside at that point, I can participate in that. But I also get to claim my losses on my tax return. That’s gonna offset capital gains. So, you know, it’s possible to have both in the same year. You can sort of strategically pull from your taxable account to keep your taxable capital gain relatively low. You can also create a big capital loss, which even though it only offsets your income by $3000 each year, it also offsets your future capital gain. So in the future, if your- if your stocks rebound or your- your other capital assets rebound and you wanna live on those, you can pull them out tax-free even though they’re at a gain because it’ll be offset by your prior loss. So I hope I said that in a clear way. But you know, effectively this is a way for you to create for yourself tax-free capital gains for the future without being- kicking yourself out of the market. Another idea is the opposite, right? Sometimes you wanna gain harvest, gain harvesting makes sense when you’re in the 0% capital gains tax bracket, then you can raise your basis. So that’s the amount that you already pay tax on by- by paying tax at 0%. If that, if that makes sense. So, because you’ve claimed it on your tax return, even though the rate was 0%, it still adds to your after-tax basis and you’ll never pay tax on that portion again. So harvesting in the 0% bracket allows you to- to create a higher tax-free amount in that taxable pool. This mostly only applies to federal. A lot of states, including California, do not have a special capital gains tax bracket at 0%. So you may pay state tax, but at least for federal purposes, you avoid the- the 15%. Backdoor Roth IRA, I mentioned that earlier. You know, that’s you’ll contribute to a traditional IRA and then convert immediately to a Roth IRA. You would do this if your- if your income is too high for a Roth IRA. So Roth IRA direct contributions have AGI limits. Depends on your filing status, and it’s a phase-out and it changes every year with inflation. So, you know, if you’re thinking about contributing directly to a Roth IRA, you can either talk with a financial advisor. Often your tax preparer will know. If you enter it into tax software, it will tell you if you’ve made a- if you made an excess contribution or not. So you can check it that way. But if doing- if you cannot contribute directly to a Roth IRA, you can potentially contribute to a traditional IRA and then convert it. And it’s sort of a- it’s called a backdoor, right? It’s the back door, the other way into a Roth IRA. One strategy that doesn’t really apply to that many people these days, but- but it’s really powerful when it does, is called net unrealized appreciation. This happens when you’ve worked at the same company for a really long time and you’ve invested in that company’s stock- in that company’s retirement plan. So- so, you know, if Pure Financial was publicly traded and I had a bunch of Pure Financial stock in my 401(k) here, then- then at my retirement, I could move that stock directly to my taxable account, my brokerage account. And by doing that, I would pay tax only on what my retirement plan paid for that stock. And then everything else would be capital gains instead of paying tax at ordinary rates on all the growth that my stock received. So if you have tax in a company that you worked for in a retirement plan at that company and it’s grown a lot in value since you started, this might be something that you’ll wanna take advantage of, and really explore with- usually- usually you’ll want an advisor, that’s- an advisor’s the most appropriate professional to help navigate all the forms and everything that are needed for that. So charity. I mentioned earlier that it’s possible to sort of plan your itemized deductions in a way that is advantageous. And one of the main things that we like to do, I talked about this in the year-end webinar, which is available on our website, is group your deductions. One of the easiest ones to group is charitable contributions. So if you have a decent amount that you give to charity each year, you can do it all in one year and then maybe skip the next year or two, in order to itemize this year, and then, claim the standard in future years. The idea then is that over the course of the 3 years, you have deducted more than you would have just doing it steady the regular way. So there’s a couple different strategies that you can use for donor advi- or for charitable gifts. One of the most popular is a donor-advised fund. This actually gives you a double benefit. So, the way that this works is that you can put your cash, your stocks, or your other assets into a donor-advised fund. This fund exists as effectively a charitable entity. So you get the- the deduction immediately. So if you put 3 years worth of gifts in here, then you get to claim that 3 years worth of gifts in one year. Then the donor-advised fund will distribute at your direction whenever you want. So you can still get the charity the money over the course of the 3 years. And why would you wanna do that? For those of you who are charitable, you know that once you give a donation, the charity calls you the next year and says do you wanna give another one? So if you gave them a huge donation in one year and then said, oh no, I’m not gonna do it this year, that- that might be really hard to do. So this allows you to take the deduction all in one year, but actually trickle the money out to them over 3. They also get the advantage of any growth that happens in here. The other reason why this is popular is because there’s actually a double benefit. So there’s very few places in the tax code where you get to sort of double deduct something or double benefit from something. But this is one of them. If you have highly appreciated stock or just- I guess any amount of appreciated stock. So it’s gone up in value or other capital assets, but most commonly stock, you can contribute this and you get to deduct the full value, even though you don’t pay tax on the gain. So for example, you purchased a stock for $10,000, it’s now worth $40,000. If you sold that stock and then contributed the $40,000 to charity, you would pay tax on $30,000 of capital gains. Here you can contribute the stock directly. You still get the deduction for $40,000, but you do not pay tax on the $30,000 of gains. So it allows you to claim two benefits at the same time. If this is a- a valuable strategy for you, then you know, you’ll wanna really balance from year to year, are you claiming the standard or the itemized? And try to try to push it all together. You might also pair this with other strategies where you add income, like a Roth conversion. Another charitable strategy, that applies if you are 70 and a half or older is a qualified charitable deduction. That’s a charitable contribution directly from your IRA. It’s also a double benefit because you get the- the standard deduction and you get to exclude that IRA contribution or IRA distribution from your income.
ANDI: We have a number of questions, and I can guarantee you right now we are not gonna be able to get to all of them, but we are gonna do our best to get to as many of them as we can. But in the meantime, I wanna mention that if you are armed with the right information, you can control how much tax you pay now and in retirement. And to begin implementing any of the tax saving strategies that Amanda has been talking about today, just sign up for a free tax reduction analysis with one of the experienced financial professionals at Pure Financial Advisors. I’ve put that link into the chat so that you can schedule that at a time and date convenient for you. You will learn how to legally pay fewer taxes than ever before. The benefits of a Roth IRA, which Amanda has been speaking about already, the myths and mistakes to avoid. Plus you’ll learn tax loss harvesting techniques, tips for reducing taxes on your investments, and how to generate tax efficient income in retirement. This is a no-cost, no obligation, one-on-one tax reduction analysis, and it’s tailored specifically to you and your financial situation. Pure Financial is a fee-only financial planning firm that does not sell any investment products or earn any commissions. And Pure Financial is a fiduciary, so required by law to act in the client’s spent best interests. Pure Financial Advisors has 4 offices in Southern California and new offices in Seattle, Denver, and Chicago. But it doesn’t matter, because you can meet with one of our experienced professionals from anywhere you want online via Zoom. Just click the link and choose the date and time that works best for you. Click that link and schedule your tax reduction analysis now. Now, getting back to those questions, “Isn’t it better for a rollover of the full amount from a 401(k) or IRA to a Roth IRA, and then pay the taxes due outside of the IRA.”
AMANDA: Yes. I think- So yes, I think I understand the question is, is to use money that’s not from the IRA to pay the taxes on a conversion or a rollover. So most rollovers are gonna be tax-free, right? If it goes pre-tax to pre-tax or- or Roth to Roth. Then you don’t really have to worry about paying any taxes. Sometimes you do if you do an indirect rollover, so you took the money out and then you’re gonna do 60 days, put it back in. You have to make sure that whatever came- came out for taxes is repaid in order to do the full rollover. And that would be paid with outside money. Also, when you do a Roth conversion, yeah, you usually wanna pay the tax with outside either cash or, not very taxable investments. Because otherwise you wind up with a little bit of a spiral, right? You- you pay- you take out extra to pay the tax and then you pay tax on that and then you need to take out more and you pay tax on that. And so it’s just, if you have the- the money on the side, it’s just a lot easier and a lot cleaner.
ANDI: “Do we need to pay the taxes on the Roth conversion in the quarter in which we do the Roth conversion? And what is the percentage estimated tax required? And if so, is there a form that we need to submit to the IRS or state for that quarter?”
AMANDA: That’s a great question. And actually I’ve been- I’ve been answering that question all morning. Because people are filing their tax returns right now and they’re trying to figure out, you know, did they do their- their payments on time? So the default calculation for penalty is that you should have all of your income evenly across the 4 quarters and you should pay your taxes evenly across the 4 quarters. So if you don’t do anything special, that’s what’s gonna happen in- in tax software. That’s what your CPA or tax preparer is probably going to assume. And if you did a Roth conversion, for example, or any other high income producing event like you sold a rental or anything like that, if you did that in the beginning of the year, then treating it as quarterly and paying over the course of the year is probably beneficial and probably easier. But if you remembered on December 21st that you only had until the- the end of the year to do a conversion. And you did a conversion in that last week of December for, you know, a large amount, and then you just immediately paid the estimated tax, you’ll be wondering why are you getting this penalty? And the reason why is because you- you have to do a special form. It’s called, Annualized Income, I think. It’s a Schedule AI that goes with form 2210. And that lets you shift your income to the quarter where it occurred and your payment to the quarter where it occurred so that they match up. And that should reduce or eliminate your penalty if you did something in quarter 3 or quarter 4.
ANDI: All right. As I mentioned, we have a number of other questions that I don’t know that we’re gonna have time to get to, cuz I know you’ve got still the SECURE Act 2.0 to talk about. So, if you don’t get your question answered today, go ahead and click that link that I put into the chat. Schedule a free tax reduction analysis, get all of your questions answered one-on-one rather than in this group setting and with such limited timeframe. In the meantime, Amanda, I’m gonna throw it back to you to go ahead and wrap up and we’ll try and get more at the end if there is time.
AMANDA: All right, that sounds awesome. So, I wanna go over the tax deadlines just really quickly. April 18th is coming up fast and furious. That is the first quarter estimated tax payment and the regular tax filing deadline. That means that’s the deadline for doing IRA contributions, HSA contributions and- and if you don’t file an extension, a lot of retirement plan contributions as well. June 15th, September 15th and well, oh, I’m sorry- April 18th, June 15th and September 15th are all estimated tax payment deadlines. So this is quarter one, quarter two, quarter 3. So depending on when your income producing event occurred, you’ll need to make payments during this time. October 16th is the extended deadline, so you can request an extension for April 18th and it will go to October 16th. This is all for individual income tax returns, not businesses. But if you are in California, and I think it’s also Alabama and Georgia, almost every county in those 3 states has been declared a federally declared disaster area due to different storms that have occurred in the early part of this year. And for us, all of these deadlines are pushed to October 16th. So normally if you wanted to contribute to an IRA or an HSA or something that has an April 15th deadline that’s not extendable, you know, if you’re in the disaster area, that’s actually pushed back to October 16th as well. And then December 31st, you know, year-end, anything that has to occur during the year, has to occur by the 31st. So I did wanna take a couple of minutes to talk about the SECURE 2.0 Act. I will let you know also, since we are kind of short on time, I did a video on this. It’s on our website. I also did a short video that I realized earlier today I was wearing the same exact outfit for, in January. So you might be able to find that on our website. That one’s only like 5 minutes or so. But you can get a lot of information from those. So I’m gonna kind of run through these- these topics relatively quickly. One of the biggest things that came out of SECURE 2.0 is that there’s more Roth options than ever. So we were talking earlier about, you know, you pay the tax first and then you, you can distribute tax-free. So we really like those accounts, but they’re Roth IRAs are limited by your AGI. And Roth 401(k)s and 403(b)s required- had required minimum distributions and- and were pro rata distributions. Now, it’s a little easier to save into a Roth and they’re even requiring it in some instances. So more plans are gonna offer Roth contributions. Highly compensated individuals over age 50 will be required to put their catch-up into- into Roth contributions so that right now that would be, the $7500 out of the $30,000 limit for people who are over age 50. And there’s gonna be options to move 529 plans into Roth. There’s also going to be what’s called a pension linked savings account. And that’s gonna be like for an emergency and that will be a Roth-style account. So there’s a lot of just different kinds of ways that you’re gonna be able to put money into retirement accounts, let it grow tax-free while it’s in that account, and then pull out not only what you put in, but also the growth tax-free. There’s a couple new exceptions for early withdrawal penalties. If you’re under age 59 and a half, you pay a 10% penalty when you take money out of a qualified account. There’s new exceptions for people who are victims of domestic violence and people who are suffering from a terminal illness. We’re expecting regulations for what will be needed in order to really prove that. But if you are in one of those situations and you need money from a qualified retirement account, you can go ahead and take it and then, you know, sort out the penalty later, cuz it is a exception to the penalty. RMDs are for, required minimum distributions. They are, if you turn 72 in 2022 or earlier, then your RMD age is 72. It was previously 70 and a half. Same thing if you were already subject to RMDs, still 70 and a half, but up- in 2022, it’s 72. If you were born in the 50s, right? So, in the 50s, so ‘51 to ‘59, then the age will be 73 and 1960 and later the age will be 75. So just allows you some more time to accumulate funds in your retirement account, particularly if you need to keep working, or if you, if you don’t need the money that’s in your retirement account at that point. The RMDs for Roth 401(k)s and 403(b)s are going away. I mentioned that. Catch-up contributions are changing, so for highly compensated individuals that’s gonna go to- to Roth. And the other thing is for IRAs there’s a catch-up of $1000. It’s been $1000 for at least 15 years. It’s gonna be indexed for inflation going forward, so- so it’ll allow for more money into IRAs particularly, which is really valuable if you don’t have an employer plan. And there will be special catch-ups if you’re between age 60 and 63. And that’s my quick summary of SECURE 2.0.
ANDI: Fantastic. Thank you so much for that. As I mentioned, you know, we’re only a couple of minutes before the end of this webinar. I wanna make sure to respect everybody’s time. We do have a number of questions left that we didn’t get a chance to get to, so this would be the time. Go ahead and click that link that’s in the chat. Schedule your free tax reduction analysis, get all of those questions answered. I’m gonna try and wedge in a couple of short ones. We’ll see if we can get ’em in the next minute or two. “My accountant said quarterly taxes this year are not due until October. Is this correct?”
AMANDA: Yes. As long as you’re in one of the affected counties of California, or Alabama or Georgia. Then yeah, all* everything from the date of the disaster declaration all the way through October 16th is all now piled onto the October 16th date. So for San Diego County where I am, that’s actually your Q4 2022 payment all the way through your Q3 2023 payment, is all October 16th, 2023.
ANDI: Okay. “And do we know yet what the future brackets are for the tax rates in 2026? Like for example, current married joint filers, the 22% bracket starts at $89,000, but where does the new 25% bracket start in 2026?”
AMANDA: I would love it if I could tell you that. A few years ago, I would’ve had a little bit of a better answer. But with the inflation the way that it’s been, all of these are adjusted for inflation. So each year, just like the Social Security payments are adjusted, the limits for IRAs, retirement accounts, tax brackets, IRMAA, all of these things are adjusted for inflation and all these levers get pulled at the same time. So it’s really hard to say where, where the bracket will be. But if you think about it like you expect your income to adjust with inflation, then you will still- if you’re already in 22%, you will likely be in 25%.
ANDI: And 2026 is like a long time from now. So many things could change between now and then. Amanda, thank you so much for taking the time to walk through us this all- all of this information with us today. Really, really appreciate your time.
AMANDA: Of course. Glad do it.
ANDI: Thank you all for joining us as well. If you have any questions, schedule that free tax reduction analysis, get all of your questions answered, in time for tax season, which is we’re, we’re here. Let’s do it now. Get on the calendar, schedule that free tax reduction analysis with an experienced financial professional here at Pure Financial Advisors. Thank you all for joining us so much. We’ll see you again soon.
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CPA – Certified Public Accountant is a license set by the American Institute of Certified Public Accountants and administered by the National Association of State Boards of Accountancy. Eligibility to sit for the Uniform CPA Exam is determined by individual State Boards of Accountancy. Typically, the requirement is a U.S. bachelor’s degree which includes a minimum number of qualifying credit hours in accounting and business administration with an additional one-year study. All CPA candidates must pass the Uniform CPA Examination to qualify for a CPA certificate and license (i.e., permit to practice) to practice public accounting. CPAs are required to take continuing education courses to renew their license, and most states require CPAs to complete an ethics course during every renewal period.
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