Amanda Cook
ABOUT Amanda

Amanda Cook, Esq., CPA has been practicing in San Diego County since 2011. Amanda’s career has focused on issues relating to the intersections of small business, personal finance, and income tax. In her career, she has worked with people across the income spectrum to help them achieve their financial goals through tax planning and budgeting. [...]

Learn from Pure Financial’s Tax Planning Manager Amanda Cook, CPA, Esq.,  how Roth conversions, tax loss harvesting, tax gain harvesting, the Backdoor Roth IRA, net unrealized appreciation, and charitable giving strategies such as a donor-advised fund can help you reduce your tax liability, and which of these strategies fit your specific needs and goals.

Free download: 2024 Tax Planning Guide


  • 00:00 – Intro & Tax Filing Deadlines
  • 02:09 – Tax Terms
  • 08:43 – Retirement Saving Strategies: Tax Diversification
  • 14:20 – 401(k) Balances By Age
  • 15:10 – Retirement Plan Options: 401(k), IRA, self-employed solo 401(k) & SEP IRA
  • Audience Questions
    • 25:12 – Please explain the Roth 5-year rules.
    • 27:15 – Should I wait to do Roth conversions until retirement when I’m in a lower tax bracket?
  • 35:36 – 2024 Tax Rates & Capital Gains Rates
  • 37:50 – Filling Up the Tax Bracket with Roth Conversions
  •  39:27 – When Not to Do a Roth Conversion
  • Tax Planning Tips
    • 42:14 – Tax Loss Harvesting
    • 43:49 – Tax Gain Harvesting
    • 44:28 – Backdoor Roth IRA
    • 45:33 – Net Unrealized Appreciation
    • 47:14 – Charitable Giving: Donor Advised Funds
  • 50:01 – Schedule a Tax Reduction Analysis
  • Audience Questions
    • 51:03 – Should you take a required minimum distribution at the beginning or end of the year?
    • 52:02 – Does rental income count as qualified income for contributing to a traditional IRA?
    • 52:38 – Do you need employment income to do a Roth conversion?
    • 53:08 – Does each Roth conversion have its own 5-year clock?
  • 55:03 – Should you withdraw from Roth or pre-tax accounts first in retirement?

Tax Reduction Analysis


Kathryn: Welcome to our tax planning webinar with our own Tax Planning Manager and CPA, Amanda Cook. She’s going to help you with our taxes as April approaches.

Amanda: Happy to spend some time with you today, to talk about what to consider for last year’s taxes and also what to consider for this year’s taxes.  Since it’s on the brain, this is the time of year that we’re thinking about it, with a particular focus on your retirement planning. So without further ado, I’m going to go ahead and get started. The first thing to know is that the filing deadline is April 15th. A lot of years, it might be delayed a day or two. There’s some DC specific holidays and things like that, that have been making it not April 15th for the last several years, this year is April 15th. However, if you are in San Diego, as Kathryn mentioned, you do have until June 17th. That’s for San Diego County residents.  That’s a result of the major storms that we had in January. There’s a handful of other places around the country that have filing extensions. I saw actually right before coming in here that Hawaii wildfire victims and Maui on Maui, have until August 7th. So there’s a few other extensions that are out there. A lot of Michigan, most of Maine, an area of Spokane, Washington. So different disasters that have happened that may extend this deadline. When that happens, that extends your original filing deadline. So anything that is due by the filing deadline that normally would not be extendable, is actually extended to that new date, including paying your taxes. So that’s a really important distinction. I’m going to start off just talking about some tax basics. We’re going to go through basically a little bit of a glossary of what the different terms on your tax return mean. If you have your tax return handy, that would probably be really helpful to kind of follow along.  But you’ll see that it follows a pretty logical pattern through the tax return. So first you list all of your income sources, and this is, you know, any type of income that you’ve received during the year, it all gets listed out line by line. Some of it comes from other schedules onto the lines and the total of that number is going to be your gross income. So the only things that you’re going to see deducted from your gross income is like your business expenses, if you have them. Maybe some commissions or selling expenses, if you sold a home, something that like that, that goes into that initial number, your capital gains number, your net business income, but otherwise than that, your gross income is just what it sounds like, gross. Then you have adjustments from that income. These used to be called above the line deductions. There was a line on the tax form that- that these were above. So that’s why they’re still called that. But these are deductions that you can take from your income, even if you’re not itemizing your deductions. So the most common ones that apply to non-business owners are the education deduction for teachers where you can take an above the line deduction of $300, maybe $350 now for school supplies that you’ve paid for your classroom or things like that and the IRA deduction, which we’ll talk about. If you’re a business owner, you can deduct your self-employed health insurance, your one-half of self-employment tax and your self-employed retirement contributions, which we’ll talk about here too. Another one that’s really valuable, that’s still available for last year, is HSA contributions if you didn’t already max out for 2023. Your gross income minus your adjustments gets you your adjusted gross income. So this is a really important number on your tax return. It’s called this on your tax return. There’s going to be a similar line usually on your state return. This number is often used for phase-ins and phase-outs of different things that are on your return. So for example net investment income tax is contingent on your AGI.  Your IRA contribution limits are contingent on your AGI.  Your medical expense deduction is contingent on your AGI. So this number gets used for a lot of different calculations within your tax return. It’s also used to determine your Medicare tier if you’re on Medicare. So it’s a really important number. Sometimes it’s modified and then it’s called modified adjusted gross income. There’ll be little additions and subtractions that go with it. But for the most part, this is going to be a pretty important number.  After your adjusted gross income is calculated, you have the option to take either the standard deduction or itemized deduction.  The standard deduction this year, for married filing joint is $29,200. It’s half that for single people, $14,600. For head of household, it’s $21,900. Head of household is people who are unmarried or considered unmarried for the year, who have a dependent in their home.  If your itemized deductions are above these numbers, that’s when you might want to itemize instead. Itemized deductions include state and local income tax, property tax and personal property tax. Those are capped at $10,000.  You can also deduct your mortgage interest paid. That’s the limited to a principal balance of $750,000 for most people, but it’s not limited by amount. So in this high rate environment that we’re experiencing, your interest deduction may actually be more valuable than it was in the low interest environment because the interest paid on that $750,000 will be higher. So that’s an important thing to keep in mind. Also, if your mortgage predates the Tax Cuts and Jobs Act, so before 2018, you may still be eligible for the higher limits that applied before that act was passed, which is a $1,000,000 limit.  Medical expenses, I mentioned earlier, they have to be more than 7.5% of your income before they’re deductible and then charitable contributions are also limited by AGI the other way. You can only deduct a maximum  of 60%, 50%, or sometimes 30% of your AGI, depending on the type of contributions that you’re making. So once you’ve decided between the standard and the itemized deductions, you may have a QBI deduction, qualified business income deduction, and then you’ll get to taxable income. So itemized or standard, QBI if you have it, and then taxable is coming off your AGI, those things are coming off your AGI to get to taxable. The taxable income is what your actual tax is based on. So that’s going to determine what tax bracket are you in for both regular income tax purposes and capital gains tax purposes. Those two rates will get sort of blended together. We’ll talk about that a little bit more in detail to determine your overall effective tax rate. Once you have determined what your tax is, you may be eligible for certain credits. These credits are dollar-for-dollar reductions to your tax. So a deduction of a certain amount and a credit for the same amount, the credit is going to be more valuable to you than the deduction would have been because in the deduction sense, you’re just going to save the tax on that amount of money. Where in the credit sense, you’re going to save that money. That’s going to be a dollar-for-dollar reduction to your tax. All right. So with that in mind, let’s talk about some retirement saving strategies. And I first want to go through, just sort of like a conceptual layout of when you’re saving for retirement, what are the kinds of places that you could put your money, to really benefit yourself now and also in the future. And so it’s just really important to understand what these different locations are.  So first we have the tax-deferred pool.  These deposits are made on a pre-tax basis. That means when you put the money in, you have not already paid tax.  Okay, and this is what you’re probably the most familiar with, your 401(k)s, are going to be in here normally, your traditional 401(k)s, traditional IRAs are often here, 403(b), 457,  right? So these are your typical, employer sponsored retirement plans. And what we find is that this is where people are saving the bulk of their money most of the time. So, these limits, we’ll talk about the limits in a- in a minute, but, these are limited each year. That’s the maximum amount that you can set aside and you save that tax this year, but this is just tax-deferred, right? So the money’s going to be in this account. It’s going to be invested every year, you know, hopefully it grows. And then eventually when you retire, or if you’re already retired, you take this money out. And you pay ordinary income tax rates.  So ordinary income tax rates tend to be the highest tax rate.  That’s going to be right now, 10% to 37%.  In 2026, when Tax Cuts and Jobs Act expires, if Congress doesn’t do anything about it, these are going to go back to the old rates, which are 10% to 39.6%.  So, this is the rate that you’ll pay when you take the money out on both what you put in and all the growth that has occurred in the account. Another option that you might have is saving into a Roth account, right? So this is your Roth IRAs, but there’s also designated Roth accounts in 401(k)s,  403(b)s, etc. So a lot of times you can elect to make your employee contribution on a Roth basis. And the way that this works is your deposit is after-tax. So when you put the money in, you pay the tax and then the money’s in here. And hopefully it grows.  And then when you pull the money out, it’s taxed at 0%.  Why is it taxed at 0%?  Number one, because you already paid tax on some of it.  And number two, this is just the most valuable feature of a Roth, all the growth is tax-free, as long as your distributions are qualified. So usually there’s a holding period for the account. It has to be open at least 5 years and you have to be over age 59 and a half. There’s some other exceptions that allow you to take qualified distributions earlier than that. But, the most important thing is if you’re saving this for retirement, you can save this for a really long time, let it grow as much as possible and take all that growth out tax-free. The third type of account is a regular taxable account. This is what we think of normally as your like brokerage account.  So that’s where you’re going to invest, you know, in your stocks, your bonds, things like that.  That money also goes in after-tax because it’s money that you had, you know, leftover for your savings, something like that. So it’s already in your account. You’re already paying tax on that.  The portion that you’ve paid tax on creates a basis, which is after-tax. And then any growth that happens will come out at a variety of rates, but the goal is for it to come out at capital gains rates, which are 10%, 15% or 20%. Sometimes if your AGI is over $200,000 or if you’re married filing jointly $250,000, there’s an additional 3.8%.  So that happens sometime in the 15% and in the 20% bracket.  So maximum tax rate here is 23.8%.  Maximum tax rate here is 37%, scheduled to go to 39.6%. And the maximum tax rate here is 0%.  So identifying where’s the best place to put your savings is really important. Sometimes it does make sense to save on the tax now, right? But other times it makes sense to pay the tax.  And then allow the money to either grow tax-free or be accessible to you before you’re 59 and a half. With that in mind, I wanted to just kind of shed some light on where are we at as a country, right? So you can kind of think about your own age and your own 401(k) balances and see where you fall on this chart. But this is the average 401(k) balance. And then this is the median. You can see the median is a lot lower than our average balances. This is because 50% of people are below the median and 50% of people are above the median. These average numbers are higher because there’s some really good savers out there who are really pulling that number up. This is 401(k)s only across the country, but it’s just kind of a useful benchmark to see where you’re at. So, what are the options that you have?  If you’re an employee, your options for 2023 are pretty limited. You’re going to be, you’ve already made your 2023 employee contributions. Those are your payroll deductions.  But this is a really good time to assess. Did you get the tax savings that you wanted last year? And do you want to continue doing the same amount and the same type of contribution this year?  For 2024, elective deferrals are $23,000 if you’re under age 50.  If you’re 50 or older, you can do an additional $7500. So that’s a total of $30,500.  If you have a 457 plan, in addition to usually a 403(b), you can make those elective contributions again to the 457. The 457 does not count against your limit for 401(k) and 403(b) and TSP.  The total contribution to the plan is limited to $69,000.  And then if you’re over age 50 and you did catch up elective deferrals, the total is $76,500. That additional amount is often made up by employer contributions, but there are certain companies that maybe once you’ve maxed out your contribution, and once they’ve put in whatever their employer matches, they allow you to do after-tax contribution. So, after-tax contributions are a little different than Roth. They create basis in your account, but a lot of them will allow you to do what’s called an in-plan conversion. So you make the contribution after-tax and then you move it to a Roth account within the 401(k) plan. So if you’ve ever heard anybody at work talk about an after-tax contribution, that may be something to look into if you’re already maxing out on your regular elective deferral. For high earners, there was a new rule with SECURE 2. 0 that was meant to go into effect for 2024. And that rule said that your catch-up contribution, so that additional $7500, had to go to Roth, which meant you had to make a separate election  to do the catch up contribution and specify that you were putting it in your Roth account. Otherwise, it could be an excess contribution to a pre-tax account.  That rule has gone into administrative forbearance, it’s called, for the next two years. So it will actually take effect now in 2026.  But that’s a really important rule to keep in mind if you make more than about $150,000 a year, then you’re going to be forced into Roth for this additional $7500. The other option for savings, if you don’t have an employer plan available, is to do a traditional IRA. Now, even if you do have an employer plan available, you can still contribute to a traditional IRA, but you might not be able to deduct the contribution. So you’ll create basis in your IRA.  But if you are able to deduct it, then you can still do that for 2023 until the original deadline of your tax return. So again, for most of us, that’s going to be April 15th. But if we have a disaster declaration, you can go up until that extended deadline to make a contribution.  Roth IRAs are also available, but they are subject to income limit.  So if you’ve ever heard of a concept called a backdoor Roth IRA, that’s actually, usually a non-deductible contribution to a- to a traditional plan, and then a conversion to a Roth. If you have any kind of side income or you’re self-employed, you can also set up self-employed retirement plans. New for 2023, if you’re a Schedule C filer, you still have until April 15th to set up an individual 401(k) for yourself. So that’s a really valuable option. If you haven’t thought of it already, you have positive net income from self-employment this may be something that you want to consider, especially if you’re not maxed out at your employer or you don’t have another employer. It allows you to get the most contributions because you can do those elective deferrals plus your- your own employer. So you can do an employer matching contribution that you set up. For you to get that extended deadline to April 15th, it needs to be an unincorporated business. So not an S corporation or a C corporation, and you have to be the sole owner. And sole employee.  The value here is that it’s not included in pro rata calculations. So if you have basis in an IRA, like we talked about making non-deductible contributions to an IRA, it can be difficult to pull that basis out because every distribution that you take out, it’s going to be partly free tax money and partly your basis. This is not going to count towards that calculation, so you can put pre-tax money here and keep your- your pro rata amount in your IRA lower so that you can have more of your basis come out each year.  There is a form to file, it’s called 5500EZ.  This is required when the balance is more than $250,000 or in the year that you close the plan. So the penalties for not filing this form are pretty severe, especially if the IRS catches you before you catch it, so it’s really important to be aware that this filing requirement exists.  There’s two other options for self-employed people, that are really valuable. The SEP IRA contributions are employer contributions only. So that can be set up all the way up until the deadline for your employer return, including extensions. So if you are your own employer, you can put that on extension. You can go all the way out till October to set up this plan and make some contributions. And there’s no 5500EZ requirement for SEP IRAs. Simple IRAs are just kind of like a small traditional IRA plan.  There’s a relatively small amount of contributions that can be made on the employee side. And then there’s usually a mandatory match on the employer side. So, both of these brand new are allowed to be Roth.  So that’s new under SECURE 2.0.  Previously, the only option for those was pre-tax. If you wanted to do Roth savings, you had to do a 401(k). Now, these two types can also be Roth. Most of what I’ve been talking about for people who have a business is if it’s really just yourself operating the business. When you have employees, there’s two important things to note. One is, your 401(k) will be subject to some discrimination testing, and that is meant to make sure that the highest compensated person, which is usually going to be yourself, is not unduly benefiting from the advantages of the 401(k) relative to lower compensated employees. So that testing process can be kind of an administrative headache and can- can produce excess contributions for yourself, based on the formulas that the third party administrators do. So one way to avoid some of that testing is to do what’s called a safe harbor 401(k). This requires matching or non-elective contributions on behalf of all your employees. So it may be a little bit more expensive on the employee side, but it’s a little bit of a savings on the administrative side. And it probably allows you to make more contributions on your own. In California and other States are starting to do this too, but California for sure, CalSavers is now open to employers with one to 4 employees and it’s going to be mandated in the next year or two,  I think in 2025, it’s mandated.  CalSavers is a Roth style option that’s available to enroll in.  You can avoid CalSavers by having one of these other types of plans available for your employees.

Kathryn: Amanda?

Amanda: Should we stop for some questions?

Kathryn: Yes, we’ve gotten a lot. We’re not going to be able to get to all of them, but here’s just a few. So, first of all, would you please explain the 5-year holding period for the Roth?

Amanda: So, 5-year holding period is pretty much what it sounds like, right? It’s from the date that you open your first Roth account, the tax year that it’s for, it’s 5 years from that tax year. So let’s say that today you decided you were eligible to contribute to a Roth account for 2023 and you go ahead and make a contribution. It will be counted as though it was open in 2023. And so you’ll go 5 years to 2028.

Kathryn: And that’s for all of it or it’s just for the growth?

Amanda: That’s for the whole account. Yeah. So that’s a great question.  The whole Roth IRA, and all of your Roth IRAs have the same period from the first contribution that you made to a Roth IRA. Roth 401(k)s and Roth IRAs are counted differently from each other. So, if you have a Roth 401(k) for 25 years and then you roll it over to a Roth IRA, you have a new 5 year requirement.

Kathryn: Also, will you please explain the loss carry forward?

Amanda: When you’re thinking about how to take advantage of the lower tax rates within your taxable account, you can offset your gains and your losses each year. If you end up with more loss than gain, then you have what’s called a net capital loss. And you can only claim a maximum of $3000 per year, and that carries forward,  basically indefinitely,  at $3000, until you either use it up with some other capital gains or by,  by running it off $3000 at a time. If you’re married filing separate, it’s $1500.

Kathryn: Here’s another one. “Doesn’t it make sense to wait until I’m retired and have no income before I start moving my money to a Roth because I will be in a lower tax bracket?”

Amanda: That’s what we’re going to talk about next really. And- and it makes, it makes a lot of sense at that point to, you know, maybe come in for a free tax analysis and really get a sense of how it’s going to work in your particular situation because everybody’s a little bit different. Some people have, you know, really high pension income, for example, or really high Social Security that is going to be taxed at a higher level than it otherwise would be if you start taking a lot of money out of an IRA, whereas a Roth IRA is not going to impact the taxation of your Social Security. So, going to the question that I was just asked, when you’re young, right, and you’re, if you think about a normal career path, right, your income kind of goes up and up and up and up and up. And then it kind of comes down, right, when you retire. So maybe this time you want to be doing pre-tax, right? When your income is the highest level that it’s ever going to be, maybe that’s the time to focus on saving those tax dollars so that you can sort of level out your taxation over your life, right? But maybe this time frame, you want to focus on doing Roth contributions because your tax rates already low.  And so maybe it’s better to just buy it out at this lower rate.  Or once you’ve retired, or you’ve maybe gone to part time or something like that, or any year that, you know, maybe you make a career change, or you have a layoff, or something like that, that impacts your earning potential for that year. Those might be years that it made more sense to be in the Roth account. Because the goal is to minimize your tax obligation over the course of your whole life, right? So- so it’s not, you’re not going to totally save the tax on all of this, you’re going to have to pay the tax either up front or here on the back end when you take the distribution, but you can strategically minimize your overall tax burden and keep it relatively consistent through your life by paying attention on a year by year basis to what is going to make the most sense for you. For making the contributions you usually have to be working, right? I mean, these are mostly employer sponsored plans and if you- if you want to contribute to an IRA, you or your spouse also has to have earned income. So earned income can be from a business or it could be from wages, but you have to have some sort of earnings to make the contributions. Once you’ve retired, if you find yourself really out of balance here and you want to- you want to try to be strategic so that you don’t wind up with huge RMDs,  you can move money from the tax-deferred account to the tax-free account. This is called a conversion. Once you’re retired, it’s important to recognize, you know, there’s some- some other strategic advantages aside from just the tax rates that come with a Roth IRA.  The biggest one is this type of account is subject to what’s called required minimum distributions.  And so depending on your age, your RMD age will be different. For people who are already 72 or 73, they’re already taking RMDs. For people who were born during the 1950s, RMD age is 73.  For everybody born 1960 and later, it’s 75. But at this point, the IRS starts forcing you to take money out of this account, right? So whether you need it or not, you have to take this money out.  Also, if you die with money in this account, it’s called income in respect of a decedent. It is part of your estate for estate tax purposes. If you have a estate tax concern, and then it’s also taxable as regular ordinary income to your beneficiaries. So, nobody’s avoiding this ordinary income tax rate because you’re either going to pay it by taking distributions as you need them. Or by being forced to take them out for required minimum distributions. Or your beneficiaries are going to be forced to take it out at ordinary rates. For most beneficiaries, they only have a 10-year period to empty the account, so that can be a really high number. Sometimes, you know, maybe- maybe you have, you know, a number that is like a 7-figure number in here. And if you imagine distributing all of that out in 10 years, that’s going to really impact your beneficiaries, especially if they’re still working.  Over here, on the other hand, it’s also income in respect of a decedent. That means that it’s taxable to your beneficiaries the same way it would have been taxable to you. So, that’s going to be 0%, generally speaking, and there’s no RMD requirement.  So, this is a- for- for really long-term savings, this is going to help keep more money aside for a longer period of time. Also, this does not affect your AGI.  So if you’re worried about Medicare tiers, for example, or the taxation of your Social Security or something like that, and you find yourself in a bind, you know, you need some extra money. I just had a leak in my kitchen, so I needed to pull some money to do some kitchen repairs. Something like that happens, and you already are at a level that you’re comfortable with pulling money out of here. You could pull money out of here tax-free. It’s not going to affect your tax return. It’s not going to affect your AGI. So just having some money in each of these pools is helpful.  This pool, this taxable pool, this is kind of like everything that’s left over. Right. Because it’s- it kind of blends the benefits of both. You have it’s after-tax money, you have basis and, and you have some favorable tax rates, but it’s not quite as powerful as the tax-free. There’s just no limit on what you can put into this account. So if you’re already maxed out in the other two, you can put money here.  This basis is your after-tax money, and then you have the growth.  Which is what I gave those 0%, 15% and 20% rate. But if you’re- if you don’t have growth, right, you have negative growth, then that’s where you have that capital loss and you can either claim the capital loss to offset your gains, or you can claim up to $3000 per year, anything that’s left over carries forward.  So really it’s about getting this all into the right balance. Right. And that’s what an advisor can really help you do is to really look through your situation, your income, your current tax rates, your expected future tax rates, see what your trajectory is, and help you balance these over the course of your life so that you can have a more fruitful retirement and not potentially put yourself in much higher tax brackets in retirement than you even were when you were working. Related to that, this is the current year 2024 tax bracket. As I mentioned, they go from 10% to 37%. This is based on the taxable income number on your tax return.  The capital gains sit on top of your ordinary income. So you take the capital gains out of your taxable income to figure out where you are here and then you, wherever, that number is, your capital gains will be taxed at that rate. So your capital gains are not necessarily taxed at 0%, 15% and 20%. On this slide, your income will start at 10% and then it’ll go to 12% and then it’ll go to 22% to wherever you’re at, right? So it’s gonna- you’re gonna pay all those rates as you go, but once you get to a certain point, really it’s about the 12% bracket, then all of your capital gains are going to become in the 15%. And then once you are over these numbers, it’ll be at 20%. I mentioned in 2026, the Tax Cuts and Jobs Act is expected to expire, so the rates are  going to go from 10% to 37%, and also- from 10% to 37% to 10% to 39.6%. But- But the real jumps are right here.  This is where most middle income people are going to fall, and- and there’s,  particularly for married filing joint filers, these do not line up perfectly. A little bit of this is in the- what is currently the 24%. A little bit of this is what’s currently in the 22%. So you’ll find that your taxes in these middle income areas in 2026, if nothing is done, might jump pretty significantly. So how does the conversion work? You know, as I mentioned, that’s going to be pulling money from the taxable account to the tax-free account. You’re going to have to pay the tax on whatever that amount is that you pull out. Right. So that’ll be a current year tax and then everything else will grow tax-free in this account because your contributions have to be after-tax money in this account. So, the more time you have for this account to grow, the better of a strategy that this is. But even if your RMDs are going to be really high and you haven’t reached that age yet, it might be a good idea to start taking the excess amount in your tax bracket and filling up these buckets, right? So, let’s say you’re already in the 22% tax bracket.  As I mentioned, that’s going to be either the 25% or the 28% tax bracket for some people. Maybe it makes sense to go ahead and pay all of the 22% tax bracket by doing a Roth conversion and filling up that bucket.  Sometimes it might even make sense to go a little bit over here. Because again, if this one’s already at 25%, and maybe 28%, this is still a lower rate.  But it just depends on, you know, how long are you going to be in that rate? And does it make sense this year? If your capital gains are taxed at 0%, you know, you’re- you might be paying kind of like a double tax by doing a conversion.  So you want to keep an eye on where your capital gains rates are.  You might also have a qualified business income deduction affected.  There’s kind of two pieces, there’s a lower limit on the qualified business income deduction. So, sometimes doing a Roth conversion or otherwise increasing your- your gross income actually increases this deduction and other times it puts you into phase-outs, particularly for a specified service trades or businesses. Which is like everything that I’m involved in right, in the law, CPAs, financial advisors, a lot of those kinds of advice-oriented jobs, are called specified service trades or businesses. And if the income is too high, you’ll phase out of this deduction. So sometimes you want to make sure you’re preserving this while it’s still left.  This is also from TCJA, so it also expires in 2026.  You might want to be mindful of your Medicare premiums. Medicare premiums are based on your AGI, and it’s based on your AGI from two years ago. So if you’re planning to enroll in Medicare at 65, and you’re currently 63, this is the year that you need to start thinking about what is your AGI going to be for- for calculating your premiums.  And then I mentioned pro rata earlier, but this happens when you have usually a traditional IRA, and you made some non-deductible contributions. So you have basis. Each year, money is going to come partly out of this pool and partly out of this pool.  So one common strategy is to make a non-deductible contribution to an IRA and then immediately convert it to a Roth IRA if you’re over the Roth IRA income limit.  If you do that, when you have other IRA balances, including SEP IRAs and simple IRAs, then you’re not- it’s not going to be a tax-free transaction.  So understanding how much is your basis and what’s the total is important to- to knowing what the tax impact of that is really going to be. And with that, we’ll go into some sort of general tips.  Not so much retirement intensive, but just thinking about keeping all your accounts in balance. One of the things to really watch out for each year is, can you harvest some of your capital gain- capital losses, right? So at any given moment, I’m gonna use this blue circle, at any given moment, you know the idea is that stocks are gonna go up, but they go really kind of up and down throughout time. So if you can sell your stock at these low points and then reinvest into the market, and ride that up, you’re going to be able to accumulate losses on your return, then when you sell it at the high point, you can use that loss to offset your gain. So that’s kind of the idea is to sort of store losses as they occur so that you can use them to offset gains later on. A lot of times people think this means they’re losing money, right? But the idea is not to lose money. It’s just to- to take advantage of the low points in the stock market in order to offset some of the higher points later on. Similarly, sometimes it makes sense to harvest your gains. Right. If you’re in a situation where you commonly are subject to the net investment income tax, for example, and- or you expect to be in the future and this particular year  you’re not, maybe you want to avoid that 3.8% by harvesting some gains now and going and paying the tax. Also, if you’re in the 0% capital gains bracket, it always makes sense to realize gains up until the point of taxation.  It helps keep your basis close to the value. So it has kind of that similar effect of harvesting losses. The backdoor Roth IRA, this is that contribution to a traditional IRA when you’re over the Roth IRA income limits and then converting it to a Roth IRA.  So again, the idea here is for this to be a tax-free transaction. If you make a non-deductible contribution of $7000 for 2024, and then you immediately roll it over, you would expect that $7000 not to be taxed again. But if you have a lot of pre-tax money in your IRA, it’s going to be taxed twice. So, it’s important to understand how this fits into your overall plan. But if you don’t have any other IRA balances, like everything’s in a 401(k), for example, that balance does not impact the pro rata calculation. So you can make this a tax-free transaction. Net unrealized appreciation is a strategy that’s available to people who have stock in their employer in their retirement account.  And it’s sometimes it’s a really cool strategy when you purchase that stock within the retirement account at a very low cost relative to its current value. So the idea here is- is you buy the stock inside your retirement account. Let’s say you paid $1 for it, right? And now it’s worth $100.  You would move the money from your pre-tax account, actually over to your taxable account.  And by moving it to your taxable account, you pay tax only on the basis, and then the growth will be subject to capital gains rates whenever you sell the stock. So, it effectively takes money out of your pre-tax ordinary income bucket and moves it over to the capital gains tax rate bucket. This is only available for your employer’s stock inside your retirement account. So, it’s a limited number of people who can take advantage of this. And it really only makes sense when your basis is very low. Because otherwise you’re putting it into a taxable account every year, you know, dividends, rebalancing, anything like that is going to be taxable to you. The tax-deferred growth in your IRA or your 401(k) might still be better. When it comes to gifting to charity, there’s a couple of different ways that you can do this.  You know, the most common is you write a check, right, but that might be the least efficient. So we’ll talk about a couple different strategies here.  One is called a donor advised fund. This is one of the fastest growing financial tools in the country right now. What this allows you to do is create basically an investment account, and you transfer your stock directly to this fund. So you could have stock in some highly appreciated company, right? Like whatever the hot stocks are right now, that you might have in your portfolio. You transfer that stock directly into this type of an account. You get to take an itemized deduction, up to 30% of your AGI, for the full value of that stock.  Now, what does that do? Number one, it gives you a deduction, but number two, the reason that it’s better than donating the money directly, is you also have no capital gain. So all that gain that you realized in the stock, say you paid $200 for the stock, and now it’s worth $2000. You could get a deduction of $2000 and not pay capital gains tax on that other $1800 by doing this directly. The tradeoff is the limit is lower when you donate appreciated assets. So that limit is 30% of your AGI. Also another advantage of a donor advised fund is it allows you to sort of group your contributions over several years. So one concern a lot of the time is that you don’t want to give too big of a deduction or too big of a contribution in one year. They’ll be calling you all the time looking for that same amount the next year. You could do like, let’s say $50,000, right? And then you could distribute that out $5,000 a year over time to the charities. So the money can sit in this account, but you get the full deduction now. So this is really helpful if you’re otherwise below the standard deduction. You can take advantage of this in one year and then take the standard deduction the later years. All right. I think we have a few minutes for questions.

Kathryn: You’re not going to be able to get to all of them, but we do have several. And for those of you that sent in the longer detailed questions, I would encourage you, as Amanda had said, to book your own tax analysis so that you can find out your own personal questions. Because obviously armed with the right information, you should be able- you’ll be able to control how much you pay, not only now, but also in retirement. So to begin implementing the end of year tax strategies that we’ve been talking about- that Amanda has been explaining, sign up for your free tax reduction analysis with one of our experienced professionals here at Pure Financial, and you’ll learn how to legally pay fewer taxes than ever before, the benefits of the Roth IRA, if it’s right for you and the myths and mistakes to avoid. Plus you’ll learn more about tax loss harvesting techniques, tip for reducing taxes on your investments and how to generate your tax efficient income. So this is no cost, no obligation. So one-on-one tax reduction analysis, and it’s tailored specifically to you. First of all, “is it better to take an RMD at the beginning of the year or the end of the year, or does it matter?”

Amanda: Yeah, so,  it’s a- it’s a good question.  It doesn’t really matter, but what does matter is the first distribution that you take out of that account is your RMD.  So, one thing I did not mention is if you wanna do a qualified charitable distribution out of an IRA, that’s like where you write a check directly to- to a charity that can apply against your RMD. If you’re subject to RMDs in your employer retirement account and you wanna do a net unrealized depreciation distribution, that can count against your RMD. But if you wanna do a conversion or a rollover, you have to take your RMD first.  So, the first money that comes out is your RMD, and then anything that- that is after that you have more flexibility with.

Kathryn: “And does rental income count as qualified income to contribute towards a traditional IRA, even if Schedule C income is minimal?”

Amanda: So rental income is considered a per se passive activity, which means it’s almost never going to be considered earned income. Earned income is wages and money that’s subject to self-employment tax. So that’s usually going to be, you know, potentially self-employment income from a partnership or self-employment income on Schedule C.

Kathryn: “Do you have to have employment income to do a Roth conversion?”

Amanda:  You don’t. You can do a Roth conversion at any time. The only real limitation to it is that if you are subject to RMDs, as I mentioned, you have to take that RMD first. But then you can- you can convert whatever you want and there’s no limit to the amount either. You can- you can do a conversion of your whole account if that’s what makes sense for you.

Kathryn: And then this is kind of a long question, so I’ll try to- so it’s talking about opening up a Roth years ago and then you stop contributing. But they’re asking if you spread the conversion over 4 years, does each year require a 5-year waiting period to vest and this is talking about a 403(b) account that established a Roth?

Amanda: That’s a really nuanced question. I’m gonna put a quick plug in for getting a tax analysis, about these kinds of issues. There are two 5-year rules. The one that I explained earlier that just applies to the account, is the main one, right? That’s what determines if you have a qualified distribution or not.  If you are under age 59 and a half, and you’re taking money out of a retirement account, the taxable portion of money that you took out is subject to a 10% penalty. So if you are very clever about it, you might think that you could move the money from your pre-tax account, convert it to a Roth account.  And then when you pull the money out of the Roth account, you’re pulling out your own money first, and there’s no tax, that means there’s no penalty.  So to close that loophole, there’s a special 5 year period for conversions only for determining the penalty. And it means what it says is the amount that would have been subject to within the last 5 years. It’s still subject to penalty, even though it’s not taxable this year. So this is not really an issue if you’re- if you are over age 59 and a half, because it’s really about paying that 10% additional penalty.

Kathryn: “Being retired basically one year, do you use your- do you think you should use your Roth first or the pre-tax account first when you’re making withdraws?” You haven’t actually, you know, you’re first retired.

Amanda: That’s also really case by case, right? It’s all about the balance and what’s your expected tax rates. But what most people try to do is save their Roth actually for last.  And the reason for that is because it has- you’re not paying any tax on the growth, right? So the more time that it has to grow, the better.  That’s kind of like a common approach to it. But you know, it’s not, nothing is right in every situation, right? It just depends how- where your income is at in the current year, where it’s expected to be in the future. And what’s the right balance to pull from in order to- to keep you at a- at a comfortable level.

Kathryn: Any other questions that you might have here, make sure you click on these links and give us a call or go to info at PureFinancial.com. Have a wonderful day.  Thanks, Amanda.

Amanda: Bye. Thank you.

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