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Tax Cuts and Jobs Act

2024-03-22T15:24:09+00:00

In December of 2017, President Trump signed into law the Tax Cuts and Jobs Act (TCJA).  TCJA brought many changes to the tax code for corporate and individual income taxes.  Among those changes were reductions to the Federal marginal income tax brackets ranging from 1-4% depending on the marginal bracket.  By law, these reductions are set to sunset (expire) at the end of 2025, unless Congress men and women vote to extend the TCJA or pass new tax legislation.

Extending the TCJA or passing new tax legislation that does not meaningfully increase taxes may be challenging for Congress regardless of pollical party affiliation.  Since the onset of the COVID pandemic in 2020, Congress has passed over $5 trillion across multiple stimulus packages.  In combination, the TCJA and the massive COVID stimulus has resulted in significant Federal budget deficits for the last 5 years, dwarfing the historical average.  From a planning perspective, at Culbreth Wealth Management we are assuming the TCJA expires and reverts to the previous marginal brackets before TCJA.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For investors with pre-tax retirement savings, this presents an opportunity to maximize the marginal tax brackets for tax years 2024 and 2025, while the TCJA is still in effect.  To do this, an individual or married couple can implement ROTH conversions to the top of their highest marginal bracket to lock in the favorable tax rates.  A ROTH conversion is where you convert pre-tax IRA or 401K dollars into after-tax tax-free ROTH dollars.

If the tax planning is completed early in the year, to determine the amount of room remaining in the desired tax bracket, you can then be strategic in the timing of the ROTH conversion.  To further maximize the impact, you can execute the conversion during a market correction, but you will need to know the amount to convert in advance.

To discuss this or any other financial planning related topic please reach out to schedule an initial consultation at no cost at info@culbrethwm.com.

Culbreth Wealth Management is a state registered investment advisor.  Information and statements made here are not intended to create, and receipt does not constitute, a client relationship.  There are risks inherent in investing, including the potential loss of principal.

Tax Cuts and Jobs Act2024-03-22T15:24:09+00:00

Tax Planning for ROTH Conversions

2024-03-22T15:20:19+00:00

Are you taking advantage of ROTH conversions?  If so great!  Here at Culbreth Wealth Management, we are big fans of ROTH retirement vehicles (ROTH 401K, ROTH SEP IRA, ROTH IRA & etc.) because of the favorable tax status.  ROTH retirement vehicles allow the investor to invest after-tax dollars, have tax-free growth and distribute tax-free.  At death, the beneficiary can even defer distributions for an additional 10 years!  Also, unlike traditional IRAs, ROTH IRAs do not have mandatory distributions.

So how do you get more of your savings into ROTH retirement vehicles?  An easy way is to elect ROTH contributions for your employer’s retirement plan.  Another way is to implement a ROTH conversion strategy.  This is where you convert pre-tax dollars in your IRA (or 401K) into after-tax dollars in a ROTH IRA (or ROTH 401k) over a period of years to efficiently maximize your tax brackets.  It is recommended to pay the tax owed on the conversion with cash outside of your retirement account, especially if you are younger than age 59.5 to avoid a 10% penalty.  Additionally, you need to be aware of the ROTH IRA 5 -year rule on distributions.

To maximize the potential impact of ROTH conversions you can do tax planning each year to estimate the amount of room in the tax bracket that you want to stay under.  By doing this you will know the amount of the ROTH conversion earlier in the year (as opposed to waiting until December) so you can be proactive in the timing of the conversion.

Most years, the market provides an opportunity via a correction to implement a ROTH conversion at lower market values.  19 of the last 20 years, the S&P 500 has finished the year greater than 10% higher than the lowest point of max drawdown.  16 of those years, it finished greater than 15% higher than the lowest drawdown.  This means that each year, there is a great opportunity with margin for error, to execute a ROTH conversion at a lower point in the market when a correction occurs.  So next time the market drops, do not get anxious over the volatility, instead get excited about executing a ROTH conversion!  If you do not do the tax planning in advance however, you are not likely to know how much to do without going into the next tax bracket.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

To discuss this or any other financial planning related topic please reach out to schedule an initial consultation at no cost at info@culbrethwm.com.

Culbreth Wealth Management is a state registered investment advisor. Information and statements made here are not intended to create, and receipt does not constitute, a client relationship.  There are risks inherent in investing, including the potential loss of principal.

Tax Planning for ROTH Conversions2024-03-22T15:20:19+00:00

Retirement Plan Ideal for Pass Through Entities with No Employees

2024-03-22T15:17:09+00:00

At Culbreth Wealth Management we have great appreciation for fellow small business owners for all that they accomplish despite the many challenges they face.  Many seasoned businesses today have been through not one but in some cases two crises and made it out on the other side.  It is remarkable what some of them have endured the last four years and even so, after all the challenges they hurdle, the one that remains is how to manage their tax liability?   At the end of the day everybody pays taxes.  For pass through entities, that flows to the business owner.

As the owner of a pass-through small business, are you uneasy about the amount you will owe for 2023?   The good news for small businesses owners is that the government provides a very easy way to reduce your taxes via qualified retirement plans.  For tax year 2023, business owners with no employees can utilize the SEP IRA or Solo 401K to defer up to $66,000 or 25% of compensation, whichever is lower.  Additionally, it is not too late to set up one of these retirement plans!  The owner has until the tax filing  deadline (plus extensions for SEP IRAs) to make these contributions and claim them as deductions for tax year 2023.

We encourage small business owners that are thinking about utilizing a retirement plan as a tax reduction strategy to incorporate it into a larger overall financial plan.  Do this and be amazed at what you can accomplish!  Plan, implement and execute to not only have a lower tax liability but for a grander goal that those proceeds can endow.  It is not too late for tax year 2023.

To discuss this or any other financial planning related topic please reach out to schedule an initial consultation at no cost at info@culbrethwm.com.

Culbreth Wealth Management is a fee-only registered investment advisor.  CWM and its investment advisor representatives are fiduciaries, do not sell products or accept commissions, and act in the best interest of its clients.

 

 

 

 

 

 

Culbreth Wealth Management is a state registered investment advisor. Information and statements made here are not intended to create, and receipt does not constitute, a client relationship.  There are risks inherent in investing, including the potential loss of principal.

Retirement Plan Ideal for Pass Through Entities with No Employees2024-03-22T15:17:09+00:00

Low Taxes in Retirement

2024-03-22T15:13:02+00:00

In all my experience in wealth management, if there is one thing that does not change, it is that clients do not like to pay taxes, and especially in retirement.  I’ll bet you don’t like taxes either.  Who does?  Did you know that it is possible to have high income and a low tax liability in retirement?  In fact, it is not that difficult to do if you plan for it in advance.  I’ll show you how you can have $149,000 a year in distributions in retirement and only pay less than $8,140 a year in Federal income tax!

The key to limiting Federal income tax in retirement is to control your marginal tax bracket and take distributions from tax-free sources.  If you do, you may be able to keep your taxable income below a key threshold of $94,050.  For tax year 2024, for a couple filing Married Filing Jointly (MFJ) and their taxable income is below $94,050, their long-term capital gains and qualified dividend rate is 0%.  That’s right!    Z-e-r-o!

To achieve this in retirement, you have to plan for it in advance.  That means in the accumulation phase before retirement, contributing towards ROTH retirement accounts and completing ROTH conversions in an efficient, strategic manner.  Don’t get to retirement with most of your savings in pre-tax retirement accounts.  If you do, the end result is having to pay taxes to distribute which will drive your taxable income even higher, especially once you reach the Required Minimum Distribution age.

If planned properly, in the distribution phase you will be able to distribute from ROTH sources, after-tax sources and pay 0% taxes on long-term capital gains and qualified dividends.  To accomplish this, you need to create a financial plan and actively manage towards this goal.  It is not likely to be achieved by happenstance.  Obviously, everyone’s situation will differ with unique challenges, but each person can strive towards lower taxes in retirement with good planning.  If this type of goal interests you, please reach out and let’s talk about it!

To discuss this or any other financial planning related topic please reach out to schedule an initial consultation at no cost at info@culbrethwm.com.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

*This example is a thought exercise and not intended to be a precise calculation of tax owed.

Culbreth Wealth Management is a state registered investment advisor.  Information and statements made here are not intended to create, and receipt does not constitute, a client relationship.  There are risks inherent in investing, including the potential loss of principal.

Low Taxes in Retirement2024-03-22T15:13:02+00:00
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