Year-end strategies for retirement savings plans are anything but typical this year amid market volatility and uncertainty over the economy and future tax rates.
After years of advocating Roth IRA conversions, for example, some financial advisors are now curbing their enthusiasm for the moves on the expectation of lower tax brackets under the Trump administration.
Likewise, racing to pay federal and state income taxes to convert a traditional, pre-tax IRA to a Roth IRA, distributions from which are generally tax-free, doesn't make a lot of sense for retirees who may be moving in a year or two to a state with no income tax, said Andrea Eaton, a financial planner with Cornerstone Wealth Advisors in Edina, Minn.
Rather than issuing blanket rules of thumb on topics like Roth conversions, Eaton says, savers and retirees need to break decisions down to each tax year and figure out the best long-term strategy.
The same goes for handicapping tax brackets for the coming years under a new administration and Congress, notes Michael Kitces, director of wealth management for Pinnacle Advisory Group in Columbia, Md.
Under President-elect Donald Trump's plan to move to just three tax brackets, married joint-filers earning less than $75,000 annually would be subject to 12 percent in federal taxes. Higher earnings, up to $225,000, would be taxed at 25 percent. Above that, the top rate would be 33 percent. Brackets for single filers are half of those amounts, according to donaldjtrump.com.
Savers may want to be cautious about accelerating income into the end of this year if they expect their tax burden to go down in the near future, said Kitces.
"If you're in a low-income year, there's still a lot of incentive to harvest some capital gains, but higher income clients are in a little more flux," he said. "There's some discussion that Republican reforms could limit deductions, so there could be a case for pulling large charitable deductions into this year because they could be eliminated next year."
Savers who give to charities and who are facing a hefty amount of unrealized capital gains from this year's stock market run-up in their non-retirement accounts may also want to consider opening a donor-advised fund this year, Eaton said. By doing so, donors can lock in a tax deduction now to cover future donations without having to specify yet which charity will get the funds. Assets in these funds surpassed $78 billion in 2015, according to the National Philanthropic Trust.
Then there are the longer-term implications, which by definition retirement savers should be thinking about.
"Simplifying the tax brackets down to three, if it happens, it's a little unclear how sustainable that will be if they are relatively low brackets," said Eaton. "Also, if it means a lot of deductions are taken away, it negates some of the savings."
More than any specific move, experts are cautioning investors not to jump too quickly to try to pick winning stock or financial planning strategies.
"Avoid being overconfident in your own ability to know what will happen," said Jonathan Guyton, Cornerstone's principal. "There is clearly more uncertainty now, but what does that really mean? It might mean returns are higher over time, not lower," he said. And given the range of possibilities, making big bets now could be a prescription for disaster, he said.
