On Money & More – December 2021/January 2022

From all of us at Cutler Investment Group, Merry Christmas! In past December Jacksonville Review articles, we have taken this space to highlight some year-end housekeeping items that investors should be aware of. Tax-loss selling is at the top of that list, which is selling your stocks that have gone down to reduce your overall tax impact. While this may still be a great idea (depending on your tax situation), fortunately most investors have pretty significant gains in their accounts these days! Finding losses can be harder and harder in a bull market. If you find yourself in a situation with limited losses, perhaps you could use positions with large unrealized gains to make a charitable donation. Most of us make donations in cash, but consider using appreciated stock instead. This may allow you the flexibility to buy-back the stock at today’s prices, thus resetting the cost basis.

Of course, there are many things investors are thinking about at year-end. Using a December bonus to max out retirement accounts could be a tax-efficient way to build your portfolio value. In 2021, 401(k) contributions are limited to $19,500—or $26,000 if you are over 50. This is increasing in 2022 to $20,500 and $27,000. Another strategy many investors have been looking at is converting their Traditional retirement accounts into a Roth account.

Why might an investor want more money in a Roth? The reasons may vary per individual, but ultimately it comes down to whether you believe your taxes will be higher in retirement. With today’s government budget deficits, many investors think tax rates are going up, and if so, Roth’s could turn out to be a great savings vehicle. In a Traditional retirement account, investors get the tax discount today and the assets grow tax-free until withdrawn (at which point they are taxable income). In a Roth 401(k) or Roth IRA, taxes are paid today, but withdrawals in retirement are not taxed. The catch is that Roth IRA contributions are limited by your income and Roth 401(k) contributions are limited by the IRS limit of $19,500 for those under 50.

So, how do investors still maximize the use of a Roth despite the IRS limits? While there are limits on contributions to a Roth, there are no limits on converting Traditional assets to a Roth account. This provides an opportunity for what is called a “Backdoor Roth conversion.” Essentially, savers contribute funds to their Traditional assets and then convert these assets to a Roth in the same year. This strategy has even been applied to a “Mega Backdoor Roth,” which sounds like a schoolyard nickname for a very large 401(k) Roth conversion.

Intrigued? Well, Roth conversions come with plenty of caveats. After all, the entire amount of the conversion will be applied as income in the year of the transfer. This could have a material impact on your taxes and finances. You also need to be aware if there are any after-tax funds in your Traditional account. In short, talk with you tax professional about whether this might make sense for you.

We’d like to thank each of you for reading this year and supporting the Jacksonville Review. You are always welcome to ask us about any of your investment related questions. And again, have a very Merry Christmas!

All opinions and data included in this commentary are as of November 10th, 2021 and are subject to change without notice. The opinions and views expressed herein are of Cutler Investment Counsel, LLC and are not intended to be a forecast of future events, a guarantee of future results or individual investment advice. Nothing herein should be construed as tax advice. This article is provided for informational purposes only and should not be considered a recommendation or solicitation to purchase or sell securities. This information should not be used as the sole basis to make any investment decision. The statistics have been obtained from sources believed to be reliable, but the accuracy and completeness of this information cannot be guaranteed. Investing involves risk, including the potential loss of principle. Neither Cutler Investment Counsel, LLC nor its information providers are responsible for any damages or losses arising from any use of this information.