I had an interesting conversation with one of our investors — we’ll call him James — about his investing and tax mitigation plans in 2023. Read on, you’ll see why it was so interesting.
You see, he isn’t waiting until the end of the year to piece it all together.
This year, he is planning ahead.
Let’s take a look at this “case study” in the making and start with his background.
James has a strong, high-earning W-2 income. A large portion of his wealth however, is in a traditional self-directed IRA account he has built up over the years.
He is looking ahead, developing a strategy to move all his traditional IRA funds into his Roth account while mitigating the tax consequences.
His time frame is 10 years — before Required Minimum Distributions (RMDs) kick in — but he is also concerned that the IRS may change the rules and not allow Roth conversions.
So his real time frame is ASAP.
The combination of James’ W-2 and investments should yield roughly $500,000 in taxable income in 2023.
He also wants to move $350,000 from his Traditional IRA to his Roth this year, resulting in a total taxable income of $850,000.
He plans on putting $500,000 in our Leveraged Funds to mitigate this tax. That looks like:
$1,000,000 x .80 + (.20 x $200,000 the 20% being depreciated over time) = $840,000
He is using the distributions he’s received from his previous investments with us over the past 2 ½ years to help fund this investment.
This is a combination of his returns from our leveraged and non-leveraged investments, along with profits from other investments.
Here’s another piece of his 2023 tax plan … James is going to hold back moving his money from his Traditional to his Roth until the end of the year.
You see in 2022, two of his investments unexpectedly closed in late December — too late for him to offset the gains. Ouch!
This year he can convert to Roth at the year end once he is certain of his gains for the year.
James calls it his tax-planning cushion. I call it a “Plan B”.
He explained that his goal this year is to have $2,000,000 in his Roth account. His qualified investments average 12% so this would provide him with $240,000 in non-taxable income.
(One of his investment funds dropped to 10% so then he shifted the money to our CDF1 at 12% — which is IRA friendly. It pays monthly but his only wish was that it compounded … which it doesn’t. Sorry James.)
He went on to explain that in a 34% tax bracket, it takes $363,636 to generate $240,000 in income and it takes $3,030,300 at 12% to generate $363,636.
That’s an eye opener that demonstrates the power of the Roth.
It takes a million dollars more to generate the same income outside the Roth. Tax strategy is critical and might become more crucial, if the tax increases that are predicted occur.
So what’s the moral of James’ story? Don’t get caught behind the 8 ball at the end of the year … It’s happened to all of us — so plan ahead and prepare for the taxes that your gains can bring.
Although all our situations are different (consult your financial advisor) the takeaway here is to plan early and have a short-term and long-term tax strategy.
Remember: “Success is never owned, it is rented … and the rent is due everyday”.
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