Springtime should be all flowers and bunnies and sunshine … and taxes.
Hopefully yours have been filed and you did not owe too much. Now that we are one-third through the year, it is time to play catch-up and put your tax strategies in place.
First, always make sure you are maxing out all your retirement plans. The 2024 annual maximum for 401(k) plans is now $23,000 or $30,500 if you are over age 50. If you were unable to increase your contribution in January, make sure you make up for those lost months and get the full allowable amount for the remainder of the year.
Check and see if your plan offers a Roth option or an after-tax option. These may be better than a stand-alone IRA if you are not eligible to fund an IRA due to your income. Discuss your tax situation with your advisor to determine if a Roth is the best option for you. Many folks want to convert to a Roth but for some reason didn’t fund a Roth, so keep in mind that paying taxes now may be better than paying on the full appreciation in the future.
This may also be a good time to consider the back-door Roth or what I call super-funding your 401(k). You can often double your 401(k) contribution by first claiming the maximum allowable and then putting the extra contribution into the after-tax bucket. This creates the ability to convert those dollars to a Roth either now through your plan or when you roll over your retirement assets.
Make sure you work with a tax planner on this as there are specific rules around how to do this correctly. The main glitch is that in order to roll over after-tax contributions to a Roth outside of your plan, you must have already converted all pre-tax IRAs to a Roth. This is important as some taxpayers may not think to fund a Roth from the start, not wanting to pay taxes today on top of their income. It is helpful to do the math and see what is best for you. We have found it easier to fund a Roth now and then work through other pre-tax money gradually to make the back-door Roth workable.
Don’t forget that Colorado gives you a break on your state income taxes on retirement income over the age of 60 of $20,000 and over 65 of $24,000. Therefore, you may want to take advantage of this before you collect Social Security or other retirement income. Each taxpayer can convert that amount from an IRA to a Roth and avoid the Colorado income tax.
Don’t put away your tax files just yet. This is a good opportunity to plan the rest of the year. It is getting more difficult to itemize as the standard deduction increases each year. If you do plan on itemizing you need to plan all year on your charitable, medical and any deductions you can bunch two years’ worth into one. Then you can itemize in the year you have the most deductions and take the standard deduction the following year.
You can fund your charities through a Donor Advised Charitable Fund (DAF) to bunch several years together and gradually distribute out of the fund to your favorite charities. It is most beneficial to fund charities or DAF with appreciated assets to avoid paying the taxes before your donation.
Taxpayers over the age of 70 can send all or part of their RMD (Required Minimum Distribution) to a charity and avoid paying taxes on that distribution up to $100,000. Even though the Secure Act 2.0 pushed the RMD age out to 74 for some seniors, you can still gift to charity out of your retirement accounts at age 70. This is still using pre-tax dollars to fund your donation without you having to pay taxes on it first.
1. IRS.gov
Patricia Kummer is a senior wealth advisor for Mariner Wealth Advisors.