Tax-smart moves that don’t involve tax deferral

Financial Planning Dentist

Tax-smart moves that don’t involve tax deferral

There are several methods that tax planners can use that are not part of the tax deferral strategy category and that might find new and improved legs as this change happens.  

Contribute to your Roth IRA

Qualified withdrawals from Roth IRAs are federal-income-tax-free, so Roth accounts offer the opportunity for outright tax avoidance. This strategy looks even more impressive as you can pay income tax at today’s lower tax regime, and mitigate any future taxes that will preserve the gains. Additionally, because the account avoids all capital gains tax this vehicle becomes the most promising to see capital gains on, but avoid the tax consequences of selling those assets.

Making annual contributions to a Roth IRA is an attractive option for those who expect to pay higher tax rates during retirement. 

Convert to a Roth IRA

Converting a traditional IRA into a Roth account effectively allows you to prepay the federal income tax bill on your current IRA account. This account also allows you to see the assets grow tax-free. This method is capable of avoiding ramifications from capital gains and provides the necessary insurance from the rising tax rates. This is the only method that straddles both of the coming complications. Determining the amount to convert (all or partial) should be worked into your financial plan

Contribute to Roth 401(k)

The Roth 401(k) is a traditional 401(k) plan with a Roth account feature added. If your employer offers a 401(k) plan with the Roth option, you can contribute after-tax dollars. If your employer doesn’t currently offer the option, run, don’t walk, to campaign for one immediately. There is likely little cost to add such a program and this might be an oversight on the needs employees should convey to the plan sponsor. 

The DRA (Designated Roth Account) is a separate account from which you can eventually take federal-income-tax-free qualified withdrawals. So, making DRA contributions is another attractive alternative for those who expect to pay higher tax rates during retirement. Note that, unlike annual Roth IRA contributions, your right to make annual ‘Designated Roth Account (DRA) contributions is not phased out at higher income levels.

Key point: If your employer offers the Roth 401(k) option, it’s too late to take advantage of the 2019 tax year, but 2020 is fair game. For 2020, the maximum allowable DRA contribution is $19,500.

Contribute to Health Savings Account (HSA)

Because withdrawals from HSAs are federal-income-tax-free when used to cover qualified medical expenses, HSAs offer the opportunity for outright tax avoidance, as opposed to tax deferral. You must have qualifying high-deductible health insurance coverage and no other general health coverage to be eligible for HSA contributions.

You can claim deductions for HSA contributions even if you don’t itemize. More good news: the HSA contribution privilege is not lost just because you happen to be a high earner. Even billionaires can make deductible contributions if they have qualifying high-deductible health coverage.

Additional Resources for 'Taxmageddon'

Tax Mitigation Playbook

Opportunity Zone


‘Taxmageddon’ deferral strategies that you might want to punt on

‘Taxmageddon’ deferral strategies that you might want to punt on   Installment payments from asset sales  Installment sales are designed to postpone the recognition of taxable gains until installment payments are received. Postponed gains will probably be taxed at the rates for the years they are recognized. So, if rates go up, installment sellers will likely see their strategy unwound with climbing tax rates.  Maxing out on deductible IRA and retirement plan contributions Traditionally, savers use 401ks and IRA to defer taxes into the decades to come. So the tax savings we calculate for clients call them to use this vehicle to pay a lower rate in the future, if the rate in the future goes up, the value of this deferral to the saver is diminished. The taxable portion of IRAs and retirement plan distributions received in future years will be taxed at the rates in effect for those years. Prepaying deductible expenses Tax savings from current-year deductions from prepaying expenses are calculated using today’s rates. If you don’t prepay and tax rates go up, you come out ahead by claiming deductions in a later higher-rate year. This might also be a first, calling for deductions to be used in the years to come, to offset tax rates at a higher clip.  Additional Resources for ‘Taxmageddon’ Tax Mitigation Playbook Download Opportunity ZoneOverview

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