Lately we’ve seen a historic amount of spending, due of course to the pandemic and trying to keep the economic ship righted. So, who’s to know whether what we’ve done is right or wrong? Only time will tell, but for now, especially for those retired or about to retire, this is a blind crossing moment that takes some forethought and reflection to navigate. In the future, taxes are likely to go up. Biden targeted only people earning over $400,000 in his campaign promises, but as we all know, even with the best intentioned candidates, Republican or Democrat, once they get into the reality of “the books and the art of compromise,” promises are not always kept. The country has been on a bad path from a spending perspective for a long, long time. Some argue it began when Nixon took us off the gold standard. But neither Republicans nor Democrats can deny that the 25+ trillion dollars (and counting) that we have spent, which we did not have, is a huge problem.
In the 80’s and 90’s, we sold a lot of debt to China and found other creative ways to “balance” our budget, but at some point the “chickens” must come home to roost. In the future, taxes are going to increase for many of us, because as a country, we have no money and all our credit cards will be maxed, we’ve fully mortgaged our house and we’ve taken out multiple personal loans.
So, what does this have to do with taxes and tax planning? After all, this is the tax blog. Now might be a good time to convert any pre-tax dollars that you have to something that’s post-tax. If you have an IRA or any other pre-tax type of retirement account, then you need to think about whether you want to start pulling that money out now, even if you don’t need it, just to change the tax characterization to Roth 401(k), Roth IRA or Roth 457 plan, at today’s tax rates. We don’t think it is a good idea to just blindly convert whatever your balance is, because you could put yourself in the top tax rate and lose the value of planning. A strategic “bracket bumping” examination of how much you could convert in your current bracket, how much you could convert in the next bracket, etc., as well as whether you are likely to end up in a higher bracket or a lower bracket in the future, is a conversation that everyone in this position should be having with their tax planner.
If you work with a CPA, EA, or other tax professional who does not meet with you in October, November, December to plan out your tax results for the current and following year, then you have yourself a tax preparer. Nothing wrong with that. CPAs and EAs do a wonderful job and most are all great people. Their job is to write a history paper to the IRS. They take what you have done in the past year and report it on a form. What we are talking about is meeting with a tax planner; someone that does forward forecasting, meets with their clients in October, November and December to discuss their tax future and has his or her finger on the pulse of the United States’ tax flows; past, present and future. If you do not have one of those, start searching “tax planning”, “tax planner” and other associated words and find somebody that thinks ahead beyond this year to sit down and talk to. If your financial advisor claims to be a tax planner, just ask yourself how many times have they called me late in the year and asked me to come in and sit down and rough in next year’s tax returns so that they can make planning moves with you? If they’ve never done that, they’re not a tax planner.
Look at your calendar. Look at the balance in your IRA, 401(k) or other pre-tax account and look at what the country has done lately. Think about it. Then, get yourself to someone whose art and craft is tax planning and have a detailed analysis done of your present and future. You may be the long-term winner by paying attention today.