Tax Planning Ideas and Tax Updates

Year-End Roth IRA Considerations

by Alli Thomas

Dec 10, 2021

December is a great time to conduct a review of your finances and set goals for next year. You also may have heard recently that the Build Back Better act could make significant changes to Roth IRAs.

Accordingly, here are four tips if you have a Roth IRA or have been thinking about opening one and are concerned about the potential impact of the proposed changes.

If you have a Roth, reassess your investments

The Roth is a longer-term savings vehicle and frequent trading in this type of account isn’t a great idea. That doesn’t mean you should set your investments once and then forget about them forever. Now is a good time to review the holdings in your Roth and make sure that whatever you’re investing in still aligns with your risk tolerance and time horizon.

Note the updated income limits for Roth IRA contributions in 2022.

While the maximum annual contribution will remain $6,000 (with an additional $1,000 catch-up contribution allowed for workers over age 50), income limits on those who wish to contribute to a Roth IRA are increasing next year. The 2022 annual income limit phase-out for single filers starts at $129,000 and goes to $144,000. For married filers, the phase-out begins at $204,000 up to $214,000.

Consider performing a Roth conversion.

By now, you should have a very clear picture of what your total income will be for 2021. This means that you also know what your marginal tax rate is. If your income was lower this year, your tax bill for a Roth conversion may be smaller than it would be in a typical year.

You can further reduce your tax bill by making charitable donations. Thanks to the CARES Act, for 2021 you can write off cash donations to public charities equaling up to 100% of your adjusted gross income.

Higher earners, beware the potential closing of the backdoor.

If you’re a high earner, keep in mind that the Build Back Better act will, if enacted, close the loophole known as the backdoor Roth conversion for high earners. This is the loophole that allows higher income individuals to take advantage of the tax benefits of a Roth by converting traditional IRA assets.

While you would be able to perform a back-door conversion for the 2021 tax year through April 15, 2022 even if the bill is passed, there is no reason to wait.

Good financial and tax planning can at least give you some peace of mind. If you want more information on any aspect of your financial plan, we are here to help. Get started today with a no-cost, no-obligation review with our Results in Advance Planning method.

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Alli Thomas

Alli Thomas has worked in the financial services industry for nearly 20 years, with a focus on retirement-related investing. She began her career as a FINRA-licensed participant-services call-center associate at Vanguard, and then moved to Principal Financial Group, where she worked closely with employers, assisting with retirement plan set-up and design, selecting appropriate plan investment offerings, and maximizing employee participation through targeted education campaigns and enrollment meetings. Alli has also worked as a qualified 401(k) administrator and registered investment advisor for several small investment firms. She now writes about all things investment- and finance-related, leveraging her extensive experience and passion for retirement planning to help investors make well-informed financial decisions.

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