Already Planning for 2024 (Part 4)

Categories : Financial, News
October 4, 2023

Traditional IRA vs. Roth IRA – easy choice? Not so much. Add in Roth IRA Conversions (from Traditional IRAs), and year-end 2023 financial planning gets even more complicated. Yet, the long-term consequences of these conversions, positive or negative, are serious. Consequently, Van Wie Financial is already involved in our clients’ year-end planning. Naturally, it gets more intense as the remaining days of 2023 wane.

Among the most complex topics in Retirement (and year-end) Planning is Roth Conversions. Traditional IRA assets get converted to Roth IRA assets in taxable transactions, but will not be taxed when removed later in life. Today, Roth Conversions are more complicated than in the past. A few short years ago, all or part of a Roth Conversion could be reversed (Recharacterized) in the year following, so any undesired overages were easily corrected. That privilege was short-lived, and the only substitute today is better planning.

Today’s U.S. Tax Code is marked by lower tax rates and wider tax brackets than existed only a few years ago. Most taxpayers attempt to stay in one of the lower brackets by managing total annual income. Savvy taxpayers will simultaneously attempt to push income up against the next higher tax bracket, without going over by so much as a dollar. Needless to say, that presents an estimating and planning challenge.

Roth IRAs are not subject to Required Minimum Distributions (RMDs) until the account has been inherited from the original owner. Further, funds withdrawn later in life are not considered taxable income to the owner. Hence the growing popularity of Roth IRAs, which provide ultimate flexibility for income and tax planning. Thousands of taxpayers are entering into Roth Conversion Plans, many of which will span several years.

For people who don’t expect to need their entire future taxable RMDs, Roth Conversions provide one alternative. The downside lies in current tax bills, which will be incurred by the conversion. Managing those amounts is the essence of year-end income planning, and hence tax planning. But it is not the only method of reducing RMDs.

Qualified Longevity Annuity Contracts, or QLACs, are insurance products that can be purchased within taxable Retirement Accounts. With an upper limit of $200,000, the QLAC reduces the IRA account balance, thereby deferring that portion of the associated RMD. QLACs are flexible as to size within the limit and duration, from 1 year to age 85. While there is no annual return on the QLAC funds, deferring that portion of taxable income provides tax savings for the QLAC owner. To the right candidate, a QLAC is valuable.

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