CPA, Keith, David Victoria Wood discussed on Chappelwood Financial with Victoria Woods


To weaken financial show here on KT. Okay. The financial David Victoria Wood's is out this weekend on business, but she will be back next week. In the meantime, thanks again for giving us a little bit of your time today. Well, if you're just joining us we are talking about key year end tax moves that you should consider now to prepare for tax season. I know tax day is all the way on April that seven months away, but in order to make your tax day, far less painful, you need to make key tax decisions and moves before the end of the year by December thirty first and here in fall with a few months left in the year. It's a good time to take stock of where you are tax wise and make any last minute moves while you still have time. And the good news is these strategies that we're talking about today are not complicated. They're not sophisticated. You can understand and use these to your advantage to make tax season a little less stressful. And of course, before implementing any of these strategies, you should consult your tax professional attacks expert, who is a CPA tax preparer Victorian iron not CPA's, nor do we hold ourselves out to be CPA's. We do not give tax advice. However, we discuss these tax strategies with our clients and with you because they matter they're important, and you need to work with your financial advisor, your investment advisor, and your CPA to make sure that everything is working and functioning properly now one of the most common questions that we're getting right now in light of reductions to the tax rates for now. And for the next few years is should I consider a Roth IRA conversion? And again, the reason for that is because tax rates for many Americans have reduced now and through two thousand twenty five so let's begin by discussing and explaining what a Roth conversion is. When you save money in a qualified retirement account that is before tax. This is a 4._0._1._K your four zero three b a TSP a pension the teacher retirement, a traditional IRA, the one thing that these account types have in common is that they are before tax accounts. You put money in them before tax or money is put in them for you before tax, and you don't pay the taxes on that money. Now, you defer the taxes that you owe on that money to a future date, and as we've already discussed the latest, you can defer those taxes right now is age seventy and a half that number could go up here in the next year or so if. President Trump has his way. But right now as far as we know it's going to be seventy and a half, essentially, what you're doing you're electing to take the tax benefit upfront, and then pay the tax later when you take the money out, and that's really the choice that you get to make when it relates to taxes. Do you want to pay the taxes now or later? That's the simple decision that you have to make. But what if you chose to pay the tax now and get the benefit later what if you choose instead to put in after tax money right now. So that later on when you take that money out. It's not taxed that is what RAF money is it is after tax money and the law actually allows you to convert your before tax traditional money to after-tax Roth money. So let's talk about the potential benefit to you by converting. Why would you want to do this? I mean, there has to be a reason for you to do this. Right. Well, generally you. Would convert from before tax to after tax because you believe that you're in a better position to pay the tax now than you will be later when you convert money from before tax to after tax what happens well that converted amount is reported as taxable income to you. And that means you must pay the taxes on that converted him out. And the kicker here is you cannot withhold the taxes from the converted amount. So if you're going to convert twenty five thousand dollars from before tax to after tax twenty five thousand dollars needs to show up on the other side of that ledger. So how does that tax get paid? Well, it comes out of your pocket. You've got to have the cash on hand to pay that tax for that year. So, you know, while you're still working, and you've got a dedicated paycheck. Maybe you've got a two income household later on in retirement. You may not have the same amount of income coming in. So when are you in a better position to pay taxes? Well, when you've got more money to pay those taxes. So that's one reason why it's good. A good idea might be a good idea to convert now as opposed to later in retirement because you have a better opportunity, you're in better position to pay that tax. But you also have an even better reason to convert right now because as we already said earlier in the show with changes to the tax laws starting this year tax rates for most Americans are lower. So from now through two thousand twenty five your income tax rate is likely going to be lower than in. We'll be in twenty twenty six when the tax rates revert back to what they were. This means. That from now and for the next eight years, you will pay less tax on any amounts that you convert from before tax to after tax you're going to have to pay the tax anyway. Right. Like, we already said you can either pay the tax now or pay later. So why not pay it now at a lower rate because you know, tax rates are going to revert back to higher rates in the future. Now, this strategy is not for anyone like I said, you need to make sure you have the cash on hand to pay the tax on the converted amount. But it is worth exploring with your CPA and your investment adviser. You know, we've got a client and Keith he does conversions every year. And so what we do is this. We already know the amount of income that he is likely going to have for the year because we monitor the income is investments are are creating he's got an income from other sources, so he works with a CPA calls him up says, hey, how much income I am. I gonna hap how close am I to the next tax bracket? His CPA says, well, you're fifty thousand dollars away from going over into the next tax bracket. So Keith calls us up and says, all right? I want to convert fifty thousand dollars because he's already in that tax bracket. He's already going to pay the tax. So why not go ahead and convert that money, let's pay the tax now without going into the next tax bracket. And now for the next eight years he's going to be able to convert that money from before tax to after-tax he has to pay the tax on that money. Eventually anyway when he starts taking it out. So he's elected to let's pay the tax now at a lower rate as opposed to at a higher rate later on when I have to start taking the money. That's what he is elected to do. He knows he's going to have to pull that money out of the savings to pay the tax and he's comfortable with it. We've actually created a tax budget for him. He budgets that amount of money in every year and for him. It's just an expense. Just something has to do because he's going to have to do it eventually anyway now. In order to utilize the strategy. You have to make those conversions by the end of the calendar year. So in order for it to count in this tax year. It has to be done by the end of the calendar year, if you wait until after now after this year, well, it's gonna count next tax year..

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