As we approach April 15th of this year, some clients have asked if there is anything they can do to minimize their taxes this late in the game. Here are a couple of suggestions.
I would suggest that the basic IRA contribution is a useful tool. The contribution limit for those under age 50 is $6,000 for 2021. For over age 50 and above the catch-up contribution is $7,000. There are contribution income limits where they begin to get phased out. If you are eligible for a company-sponsored 401k plan and your income reaches a certain level, you are not eligible for a deductible. Likewise for Roth contributions, if your income exceeds a certain amount, you are not eligible for a Roth contribution.
For starters, you need to see if you are eligible. If you are looking to fund the appropriate vehicle, you need to spend some time figuring out what would be the biggest benefit. It is not always age-based. I would say younger people tend to lean more towards paying the tax upfront and getting tax-free growth and a Roth versus the deductibility and deferred, growth, which gives you a little more benefit currently, but it is not as beneficial in the long run.
When do you need to make the contributions for 2021?
With IRAs, you have up until the tax filing deadline, including extensions to fund those. I would say also for the self-employed people, there are much bigger contributions potentially. For business owners, the contribution limit for SEP IRAs and solo 401k plans cannot exceed 25% of compensation up to $58,000 for 2021 and up to $61,000 for 2022.
401ks, however, for 2021 had to have been established, prior to the end of the year. If you did not have the plan document established by the end of the year, it is too late to fund a 401k for 2021. SEP IRAs on the other hand can be set up until the tax filing deadline. So, for people that are self-employed, you may want to look at a SEP IRA to see if that makes sense for you.
Are there any upcoming changes in the tax law coming in 2022 that I should be aware of?
The Secure Act made major changes to the RMD rules. If you reached the age of 70½ in 2019 the prior rule applies, and you must take your first RMD by April 1, 2020. If you reached age 70 ½ in 2020 or later, you must take your first RMD by April 1 of the year after you reach 72.
There is also an opportunity for what is called a Qualified Charitable Distribution (QCD), where you take your distribution directly from your IRA and send it to a charity up to $100,000. You do not have to reach age 72. You can do that at age 70 ½. The maximum distribution is $100,000 and it goes towards your Required Minimum Distribution (RMD). If you need to take an RMD and you send it directly to a charity, you pay no tax on the distribution and it counts towards your RMD up to $100K.
Still have questions? We are here to help.
If you would like us to look at your retirement and see if you are utilizing the best possible options, we would love to meet with you and learn more about your goals to see if there is a good fit for us to work together. Reach us at 562-432-3783 or info@mbpwm.com to schedule a free introductory meeting.