2022: A Once-in-a-Generation Opportunity for Tax Planning

3 minute read

This has been a tumultuous year in the markets. If you are like most investors, most days probably felt like you were riding a roller coaster. Combine that feeling with the fact that the U.S. had the highest inflation since the 1970s and 1980s and you probably felt like there was not much good news out there when it comes to your money. But for some people, 2022 might just be what Ed Slott, CPA sees as a once in a generation opportunity to save taxes.

WATCH Your Money Map: end of year planning

TO ROTH OR NOT TO ROTH?

American’s have had access to tax deferred accounts (ex: IRA, SEP IRA, 401k, 403b, 457) to save for retirement beginning in 1974 with the passing of the Employee Retirement Income Security Act (ERISA). Then in 1997, the Taxpayer Relief Act added another type of retirement savings account- the Roth IRA. At the simplest level, all of these accounts allow for your money to grow tax-deferred, but the Roth IRA (and the Roth 401k) differ from the other types of savings accounts in how money is withdrawn ­— it comes out tax free. For this reason, Ed Slott believes 2022 is a good year to analyze if you can benefit from what is called a “Roth Conversion.” “Taxes are likely to go higher given recent record deficit spending and rising interest rates on the national debt. If you feel as if your tax rates will increase in the future, then it makes sense to pay the taxes now [converting to a Roth IRA] to avoid the higher future tax rate.” As with any tax planning, it is always a good idea to consult your tax professional to make sure you review your personal situation.

But for some people, 2022 might just be what Ed Slott, CPA sees as a once in a generation opportunity to save taxes.

– Ed Slott

IT’S NOT WHAT YOU MAKE. IT’S WHAT YOU KEEP.

Taxes continue to be an important consideration in retirement. Many people assume that if their income is lower, their taxes will go down. But consider an example from Social Security of the impact taxation can have on your net retirement income — an individual with combined income between $25,000 and $34,000 may have to pay income tax on up to 50 percent of their benefits. $34,000+ may see 85 percent of the benefits taxed. Those filing jointly with income between $32,000 and $44,000, may have to pay income tax on up to 50 percent of the benefits. $44,000+ may see 85 percent of the benefits taxed.

The message? It is critically important to think strategically about how taxes will impact your retirement income. IRS regulations allow for annuities to be tax-deferred like the other types of retirement savings accounts mentioned above, but annuities also provide more flexible withdrawal schedules if you have invested with after tax dollars. The Alliance for Lifetime Income is also a great resource and offers free tools and guides to help you get a sense of where you are and help you get to where you are going when it comes to creating a stream of guaranteed retirement income. For the latest ideas, simple tools, and inspiring stories head to protectedincome.org.

End of the Year Planning Checklist

• The deadline for a 2022 Roth Conversion is December 31st.
• If you are over 72, make sure you take your required minimum distribution (RMD) from your IRA, SEP IRA, SIMPLE IRA, or retirement plan account by December 31st.
• With the passing of the Secure Act, the IRS took the unexpected position that RMDs would be required during the 10-year period for some beneficiaries of inherited IRAs. Make sure you understand how and if the new rules impact you.
• The cost-of-living adjustments (COLA) for retirement accounts have increased the amount you can defer starting in 2023:
  • IRA contribution limits are now $6,500 (+$1,000 for catch up over age 50)
  • Employer plans (401k, 403b, etc.) are now $22,500 (+$7,500 for catch up over age 50)

Ed Slott, CPA is a nationally recognized IRA distribution expert, professional speaker, television personality, and best-selling author. He is known for his unparalleled ability to turn advanced tax strategies into understandable, actionable, and entertaining advice. He has been named “The Best Source for IRA Advice” by The Wall Street Journal and USA Today wrote, “It would be tough to find anyone who knows more about IRAs than CPA Slott.”