Your magical season

Living in northern climes, and I do consider Central Pennsylvania “northern”, has convinced me that magical seasons of the year exist so that we have something to look forward to when the worst of winter has had its way with us.

Some might consider the end-of-year holidays as their magical time while others spend most of the year pining for a pina colada (mezcal sidecar, anyone?) and a sandy beach mid-summer.

Before the final season: winter is coming

In my world, autumn is the most magical: personally I enjoy the cooler breeze, the sense of impending doom from an imminent winter, and Halloween…fall is nothing if not horror-movie-season. Professionally, fall is the most magical season for finalizing the outgoing year’s retirement planning initiatives and preparing your financial strategies for the coming one.

Regardless of age, each of us who plans to enjoy some form of retirement should spend time each year considering how best to make the most of our retirement savings goals before year-end. And let’s not assume that those who aren’t already in retirement shouldn’t be doing some planning of their own for the rest of their retirement years.

Year-end savings goals

You’ve likely heard financial planners talk about “maxing out” your retirement savings each year, though you might not know exactly what that means, given that each type of retirement account comes with its own set of rules and maximum savings caps. What better season than autumn to consider this? Many investors will still have time to pump their retirement savings into various tax-benefited vehicles before the various deadlines.

Maxing out your savings into Traditional or ROTH IRAs for the year can mean different things to different people. Those who don’t have incomes over the limits (which change annually and apply differently to married filers versus single filers) can save as much as $7,000 this year into a ROTH IRA and benefit from tax free growth. Some of these savers can still get tax deductions for their savings into their Traditional IRAs, and others have hit the income limits that disallow them deductions for those savings. For those under age 50, the 2022 savings max into these accounts is $6,000, again, depending on income limits.

401k plans can be maxed out at $27,000 (or $20,500 for those under age 50) for 2022, but are generally due by the end of the calendar year, whereas the ROTH or Traditional IRA savings can occur by April 15th of the following year.

And while IRA accounts can be funded with a check or some other form of contribution, 401k plans are, more often than not, only able to be funded through payroll.

This makes savings into these plans a bit trickier if you aren’t yet close to maxing out your savings there but would like to achieve that prior to the end of the year.

SEP IRAs, for those who are self-employed, can only be funded by contributions from the employer, but the deadline for savings here is as late as the company’s tax filing deadline plus extensions. For 2022 these accounts can allow for pre-tax funding of up to $61,000 or 25% of compensation, whichever is less.

Income phase planning

Those age 72 and older are required to take annual distributions from their traditional IRA accounts (and other types of pretax retirement plans), but with a little bit of preplanning some investors are able to avoid the most onerous income tax implications that significant Traditional IRA holdings will have on them when they hit that age.

If your annual expenses are mostly met by pensions and social security, then the size of an age-72 RMD might be exasperating when it comes. For example, a $1.5 million traditional IRA balance as of 12/31/2021 would generate an RMD of $54,744.53 in 2022 for someone who will be age 72 before the end of this year. If this investor is in the 24% income tax bracket, the federal income tax implications are considerable, generating a $13k tax bill for just that distribution.

Maybe you had planned to take regular distributions to meet your expense needs from post-tax savings before your RMDs are set to begin, but after consulting with your financial planners and tax advisors, you may find that earlier distributions can reduce the RMD by age 72 to an amount that more closely mirrors your family’s actual expense needs.

For older investors with sizeable pretax savings in retirement accounts, the years between ages 59 ½ and 72 might represent an opportunity to begin taking distributions from those RMD-required accounts. By reducing traditional IRA balances earlier in retirement an investor can lessen the impact of future RMDs and thus lessen the future tax impact.

Consider the possibility that tax rates might increase over the coming years exposing you to a higher income tax bracket just when the RMDs are set to begin, and it is easy to see how taking your tax hits today might serve you well later in life.

ROTH conversion scenarios

Toward the end of each year, especially for those well into their retirement and far from their peak earning years, many investors will work with the financial professionals in their lives to model the tax implications of ROTH IRA conversions.

For those in lower income tax brackets, during periods when the markets may have already sold off some of their gains, a conversion to a ROTH IRA from a Traditional IRA can afford the investor an opportunity to suffer a lower tax bill on the conversion and capture tax-free growth in the ROTH IRA as markets recover.

Just like the strategy discussed earlier, this strategy can help to reduce Traditional IRA holdings and lower the tax impacts of excessive RMDs in future years.

As always, consult with the tax professionals in your life and your financial planner before making any hasty, and potentially irreversible, financial decisions.

Anthony M. Conte is managing partner at Conte Wealth Advisors based in Camp Hill. He can be reached at [email protected].

Registered Representative Securities offered through Cambridge Investment Research Inc., a broker/dealer, member FINRA/SIPC. Investment Advisor Representative Cambridge Investment

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