What is tax efficiency? Generally speaking, tax efficiency is being able to pay the lowest amount in taxes. Since most people think of taxes as an annual engagement, it might make sense to think tax efficiency means simply paying as little as possible year over year.
As part of a Roth conversion strategy, you might consider not just keeping your taxes low for the current year, but for the period of time that you’re doing Roth conversions. Usually, a goal would be to determine what the ‘ideal tax bracket’ might be for your situation, then to use that as a target for planning your annual Roth conversion amounts.
A Roth conversion strategy might take years to actually implement, particularly for people who have large IRAs they’re trying to convert. During this time, a lot of changes might happen which might impact the way you implement your strategy—or at least things might happen which might cause you to ask yourself, “Am I still doing the right thing here?”
With the SECURE Act changes, many people who stand to inherit IRAs are now subject to a 10-year rule, which requires a full withdrawal of the IRA balance over a 10-year period. Without proper tax planning, this can cause a significant tax impact to the beneficiary, particularly high-earning adult children who inherit large IRA balances.
Beneficiary designations are an important part of estate planning. Despite what your will might say, beneficiary designations are going to drive where a significant amount (if not most) of your financial assets go. This holds true for virtually any financial account, ranging from your banking accounts (through payable-on-death or POD designations) to your life insurance policies, to your investment and retirement accounts.
While the coronavirus-related legislation allows for more leniency, there’s nothing new for most people. Even the rule that allows people to be taxed on their withdrawals over multiple years, or to put money back—that was designed specifically to provide flexibility to get through today’s tough times, nothing more.