Managing Taxes for the Future

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Although over 36 million people lost their jobs due to the forced shutdown of America during the COVID-19 crisis, I believe that approximately a third of those jobs have come back. Please don’t listen to politicians who say that we are in the greatest job creation period of our lifetimes – that statement is quite laughable. At best, we are in the greatest job recovery period. The truth of the matter is that we are in a time of complete and utter chaos and fear-mongering.

Facts regarding the U.S. economy and the sustainability of our debt are constantly changing. According to USdebtclock.org, our national debt has grown from approximately $19 trillion in 2017 to right now topping out over $26.6 trillion. This is a staggering increase in a very short time period, and can be attributed completely to healthy Americans being shut in their homes and policies put in place to rescue small business and families during lockdown. In fact, the Democrat and Republican parties are trying to hammer out a deal that could potentially add another $3 trillion of debt on top of that. That is approximately $30 Trillion! It would take 900,000 years for someone to count to 30 trillion! These numbers are starting to get ridiculous, and in my opinion, becoming the greatest threat to our national security. The only good news is that the rest of the world seems to be in just as bad if not worse shape than America in terms of its debt to GDP ratio. Which continues to put us in the “best house in a bad neighborhood” type of situation.

With our national debt expanding at an unprecedented speed, it makes me ponder the ability of our great nation to eventually pay down these debts. Right now, President Trump has our individual tax rates at the lowest they have ever been.* To start paying down our national debt, our tax structure will likely have to change. Trying to grow ourselves out of our debt situation hasn’t been working well for the last 20 years, and I imagine, be it after this fall’s election, or the election of 2024, that tax rates could easily go up.

All employees should consider working with their employers to determine whether there is a ROTH 401k option to their plan. The Roth 401k allows for employees to deposit into their retirement account, with after-tax dollars, with no income limit. These after-tax dollars have the potential to grow completely tax-free for the future if withdrawals are correctly planned. This could be a convenient way for employees to save for a future that could have dramatically higher taxes. We are also encouraging clients, when appropriate, to look into a Roth Conversion strategy. This allows for them to pay taxes at today’s levels on their Traditional IRA and move that money into a Roth IRA for potential tax-free growth. There used to be income limitations on who could convert their IRA’s into Roth’s, but those have been eliminated.

The next time you meet with your financial advisor, make sure you bring up the conversation regarding Roth 401ks at work, Roth Conversion, and the viability of those strategies within your financial plan. These strategies don’t always make sense for investors and should be reviewed with competent tax and finance professionals.

Be safe out there! In the environment that has been 2020, taking care of your health and taking care of your money are both things that need extreme attention.

*Irs.gov

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