Eat The Frog

Mark Twain once said, “Eat a live frog first thing in the morning, and nothing worse will happen to you the rest of the day.” I believe that many people ascribe to what Mark Twain was implying with his saying as some people prefer to take care of unpleasant tasks immediately. The second type of person likes to delay unpleasant tasks until the last minute.

Recently I have been having many of my clients wondering if they should eat the live frog first thing in the morning as it pertains to tax planning. I believe this concern stems from President Biden’s new potential tax increases. President Biden has suggested that his tax increases will only affect the wealthy. Some of the different proposals include raising income, capital gains, and payroll taxes on those with income above $400,000. There also could be an increase in corporate income taxes. These potential tax increases have people wondering if they should consider accelerating taxes on various assets and pay the tax now to help avoid paying the tax later.

Paying tax now versus delaying the tax to a later date only applies to certain assets and only makes sense for certain people to consider. Examples of assets that would be negatively affected in the future by increasing tax rates includes assets that have appreciated in value that may be subject to capital gains tax. This could include real estate, stocks, and different forms of business ownership.

Another common asset that will eventually be taxed in the future includes IRAs, 401Ks, 403Bs, and 457B plans. Generally, distributions from these types of accounts are fully subject to income taxes in the future when distributions start. Starting at the age of 72, required minimum distributions begin, which forces investors to take a certain percentage out every year. The percentage that is required to be taken out rises each year as one age increases throughout retirement.

With the different assets mentioned above, you can either delay taxes into the future, or you can choose to pay the taxes now. It would only make sense to pay the taxes now if you believed that your taxes on these assets would be higher in the future. To pay the taxes on appreciated assets, you simply have to sell the asset, which will trigger capital gains tax on the appreciated amount. Once you have paid the tax on the appreciation, you will never have to pay tax on the appreciated amount ever again.

With IRAs and other tax-deferred retirement plans, you can implement a strategy known as a Roth conversion. Essentially this strategy will cause immediate taxation on the full amount converted, but once this amount is in the Roth IRA, it can be permanently protected from increasing tax rates in the future. The Roth IRA can also be an effective estate planning tool as children can inherit Roth IRAs from parents and take income tax-free distributions over 10 years.

It is impossible to say what taxes will be on your assets in the future, as we can only make educated guesses about what future tax rates will be. At present, you should be on a heightened sense of alert if you are:

  1. A high-income earner
  2. Interested in selling a large amount of a highly appreciated asset which will cause you to be a high-income earner
  3. Expect your income to be higher in the future, causing your tax rate to increase.

If you fall into one of these three categories, it might make sense to make that painful decision to eat the frog now and pay taxes sooner to avoid paying higher taxes down the road.

This blog was specifically designed to address some common questions and concerns that we are getting regarding the upcoming tax changes. As our advisors meet with our clients throughout the year, they will actively look at strategies for each person’s unique circumstances.

Schedule a free call with one of our advisors to discuss your most pressing questions related to retirement. This can be an opportunity to get a second opinion to ensure that you are on the right track towards retirement.

Are We Right for You?

Schedule Your Complimentary Consultation Today!

About Us

Bernicke Wealth Management, Ltd. (Bernicke) is an independent, multi-disciplinary firm with 20 employees. Our financial advisers provide wealth management services for individual investors, businesses, foundations, and nonprofits, including investment planning, retirement planning, estate planning, and tax planning.

© 2021 Bernicke Wealth Management, Ltd. | Site Development: Midstream Marketing

Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Great Valley Advisor Group, a registered investment advisor. Great Valley Advisor Group and Bernicke Wealth Management are separate entities from LPL Financial. The LPL Financial registered representatives associated with this website may discuss and/or transact business only with residents of the states in which they are properly registered or licensed. No offers may be made or accepted from any resident of any other state.

Learn why you may be able to retire earlier than you think.

  • This field is for validation purposes and should be left unchanged.