By Matthew R. Staul, EA, MBA
Proposed Changes to Roth IRAs.
Seemingly every year, new tax legislation is introduced that affects our everyday lives. In 2021, the Biden administration outlined proposed tax legislation. One proposed law that stood out was the elimination of the ‘Backdoor’ and ‘Mega Backdoor’ Roth conversions in 2022. The Backdoor Roth Conversion is a strategy for people who have Adjusted Gross Incomes above the threshold for contributing to a Roth IRA ($125,000 for single and $198,000 for Married Filing Jointly). Instead of contributing to a Roth IRA, the taxpayer would contribute to a traditional, nondeductible IRA and then roll the money over to a Roth IRA. Currently, no cap exists on how much money can be rolled over using the backdoor Roth conversion. Note, though, that the taxpayer would be responsible for paying taxes on conversions that are made from pre-tax-dollar IRAs.
The ‘Mega Backdoor’ Roth Conversion is a strategy to convert pre-tax, traditional 401K dollars into post-tax dollars in a Roth account. Under the current iteration of this proposed legislation, the Mega Backdoor Roth 401K conversion will be capped off at an annual amount of $38,500 for 2021 and $40,500 in 2022. Paying the taxes upfront through Roth conversions has proven to be an effective way for many people to retain wealth throughout retirement since Roth monies are not subject to required minimum distribution rules.
Additionally, the money in a Roth can grow and be distributed without any tax implications.
Tax Planning Strategies.
One strategy to save money on your tax liability is to donate appreciated stock to a Donor-Advised Fund.
Donor-Advised Fund plans are flexible and can spread charitable contributions to multiple charities. The donor may deduct the value of the appreciated stock and not suffer tax implications for selling the stock.
Qualified Charitable Contributions.
Qualified Charitable Contributions can be a useful strategy if you are of the age where you must take Required Minimum Distributions. Taxpayers can donate up to $100,000 per year directly from IRAs instead of taking distributions and paying ordinary income taxes on those distributions. Note that the money donated from an IRA does not qualify for a charitable contribution for tax purposes.
Offset Capital Gains.
Another common way to minimize your tax liability is to offset capital gains with capital losses. Because the market has risen so much recently, finding capital losses may prove difficult. However, due to the extreme volatility of cryptocurrencies, opportunities may arise to offset capital gains from stock sales if you were less fortunate in your cryptocurrency endeavors. Note that the IRS is currently treating cryptocurrency gains and losses in the same manner as short and long-term stock sales.
Matthew R. Staul is an enrolled agent with the Medical Management Consulting Group, Inc., a full-service tax, consulting and accounting firm based in Virginia Beach. mmcgonline.com