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Tag: tax rates

  • I’m in the Highest Tax Bracket. Is a Roth Conversion a Good Idea?

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    What are your thoughts on Roth conversions if you are in the highest tax bracket and plan to be there moving forward?

    -Joel

    If you ask some financial professionals, the answer to this question might be a resounding no, and the discussion would be over. But there are arguments for doing Roth conversions, even if you are in the highest tax bracket.

    In fact, there are specific instances where converting at the highest tax rates makes sense. And they are worth considering. (If you need help managing your retirement accounts, consider working with a financial advisor.)

    Advantages of Using Roth Conversions in the Highest Tax Bracket

    Ask an Advisor: I’m in the Highest Tax Bracket, Should I Do a Roth Conversion?

    Consider these three advantages of using a Roth conversion, even when you’re in the highest tax bracket.

    Taking Advantage of Relatively Low-Income Tax Years

    This is the most common focus of planning for Roth conversions. The idea is that relatively low-income years, often thought of as the years between retiring and taking Social Security or required minimum distributions (RMDs), generate an opportunity to intentionally pay taxes.

    For younger earners, this could also be thought of as converting (or contributing) to Roth before your earnings increase as your career progresses.

    Removing Tax Uncertainty

    If a taxpayer is concerned that tax rates could go up in the future, converting to a Roth takes tax rate changes out of the equation. The tax code is written in pencil, and Congress has the power to change it at any time and in any way it decides.

    Nobody knows what tax laws will be in place in a few years, especially with the expiration of provisions of the Tax Cuts and Jobs Act in 2025. So if your concern is that tax rates will go up, converting to Roth now, in some ways, protects you from those potential increases.

    Creating Tax Flexibility

    A Roth can give you the flexibility to have funds available when you need them without fretting over the tax consequences. (If you need help with the tax consequences of your investment decisions, consider working with a financial advisor.)

    When Would It Make Sense for a Roth Conversion in the Highest Tax Bracket?

    Ask an Advisor: I'm in the Highest Tax Bracket, Should I Do a Roth Conversion?
    Ask an Advisor: I’m in the Highest Tax Bracket, Should I Do a Roth Conversion?

    The most clear-cut instance of Roth conversions making sense in the highest bracket is for taxpayers at a level of income and wealth where they can reasonably expect to be in the highest tax brackets throughout their lives. Tax rates may rise in 2026 and are currently at historical lows. For taxpayers already in the highest bracket who expect to always be there, converting to a Roth is a way to pay the devil we know instead of waiting to find out what the devil we don’t know will look like in the future

    The uncertainty of tax rates in the future may be more painful than the check you’d have to write today.

    This comes down to personal preferences and expectations for the future. By converting to a Roth in anticipation of tax rates significantly rising in the future, you are taking a risk to remove the IRS as a debt holder on your wealth.

    If rates don’t go up in your lifetime or even go down in the future (whether because Congress changes the rates or you end up with lower income in the future), you could certainly end up paying more in taxes than if you did not convert.

    It is important to make these decisions with as much information and context as possible. No one can guarantee what tax rates will be in the future. (If you need help managing the tax implications of your retirement decisions, consider working with a financial advisor.)

    Next Steps

    Whether you are in the highest tax bracket or any other, tax planning is most effective when you are thinking about the long term. Converting to Roth always means paying more in tax this year than you otherwise would have. So for a conversion to make sense, it has to be part of a longer-term plan.

    The benefits of a conversion are typically recognized over time, not in the year of the conversion. The most successful Roth conversion strategies are going to be ones that are intentional and focused on multi-year planning.

    Tips

    • Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

    • Consider a few advisors before settling on one. It’s important to make sure you find someone you trust to manage your money. As you consider your options, these are the questions you should ask an advisor to ensure you make the right choice.

    • Keep an emergency fund on hand in case you run into unexpected expenses. An emergency fund should be liquid — in an account that isn’t at risk of significant fluctuation like the stock market. The tradeoff is that the value of liquid cash can be eroded by inflation. But a high-interest account allows you to earn compound interest. Compare savings accounts from these banks.

    • Are you a financial advisor looking to grow your business? SmartAsset AMP helps advisors connect with leads and offers marketing automation solutions so you can spend more time making conversions. Learn more about SmartAsset AMP.

    ©iStockPhoto/Kobus Louw, ©iStockPhoto/courtneyk

    The post Ask an Advisor: I’m in the Highest Tax Bracket and ‘Plan to Be There Moving Forward.’ Should I Do a Roth Conversion? appeared first on SmartAsset Blog.

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  • The Next Presidential Election Is Happening Right Now in the States

    The Next Presidential Election Is Happening Right Now in the States

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    Kristen McDonald Rivet let out a big, slightly rueful laugh. “I was underestimating the level of national attention this race was going to get,” she told me. “In the extreme, I was underestimating it.”

    A city commissioner in Bay City, Michigan, McDonald Rivet decided earlier this year to run as a Democrat for the State Senate. She knew the race would be competitive in a closely divided district. But she had little inkling that the seat she was seeking would come to be regarded by Democratic operatives as one of the most crucial in the country.

    Thousands of people run for state legislatures every two years, and many of the campaigns are important but sleepy affairs that hinge on debates over tax rates, school funding, and the condition of roads and bridges. Not this year, however, and not in Michigan. With Republican election deniers running up and down the ballot in key battlegrounds, many Democrats believe that the fight for power in state capitals this fall could ultimately determine the outcome of the presidential election in 2024.

    Democrats have carried Michigan in seven of the past eight presidential elections, but they have not held the majority in its State Senate for nearly 40 years. This year, however, they need to pick up just three seats to dislodge Republicans from the majority, and a new legislative map drawn by an independent redistricting commission has given Democrats an opportunity even in a year in which the overall political environment is likely to be challenging for the party.

    If Michigan is famously shaped like a mitten, the Thirty-Fifth District sits between its thumb and forefinger, encompassing the tri-cities of Saginaw, Bay City, and Midland near the shores of Lake Huron. The area voted narrowly for Joe Biden in 2020, but Mariah Hill, the caucus director for the Michigan Senate Democrats, told me she considers it the party’s “majority-making seat.”

    McDonald Rivet won her election as a commissioner in Bay City with about 350 votes; this year, in her first run for a partisan office, she told me she had raised about $425,000, which is a considerable sum for a state legislative candidate. National groups such as EMILY’s List, the States Project, and EveryDistrict are directing money and resources to her campaign.

    Progressives have been intensifying their focus on state legislative power over the past decade. In the 2010 GOP wave, Republicans caught Democrats flat-footed, swept them from majorities across the country in 2010, and then locked in their advantage for years to come through gerrymandering in many states. Democrats reclaimed seven state legislative chambers in 2018, but their momentum slowed in 2020, when they failed to pick up a single chamber. They also lost the majorities they had gained in New Hampshire.

    In an earlier era of U.S. history, battles for control of state legislatures took on national importance as proxy fights for power in Washington. Before the ratification of the Seventeenth Amendment in 1913, state legislatures—not voters—appointed U.S. senators. In modern times, however, state legislatures are frequently overlooked relative to their influence on policies that most directly affect voters’ lives. Donors shell out hundreds of millions of dollars to sway presidential and congressional elections. But while gridlock often consumes Capitol Hill, state capitals are hives of legislative activity by comparison.

    The urgency behind the Democratic push to win back legislative chambers escalated in the run-up to 2020, when the party knew that the majorities elected that year would be tasked with drawing legislative and congressional maps after the decennial census. But it might be even greater now. The Supreme Court’s overturning of Roe v. Wade in June allowed states to severely restrict or altogether ban abortion, instantly raising the stakes of legislative races across the country.

    Another potential Supreme Court decision has spiked Democratic fears to a new level. The justices in the term that begins this month will hear arguments in Moore v. Harper, an election-law case that legal experts say could dramatically reshape how ballots are cast and counted across the country. Republican litigants want the high court to affirm what’s known as the independent-state-legislature theory, which posits that the Constitution gives near-universal power over the running of federal elections to state legislatures. A ruling adopting that argument—and four conservative justices have signaled that they are open to such an interpretation—would allow partisan legislative majorities to ignore or overrule state courts and election officials, potentially granting legal legitimacy to efforts by Donald Trump’s allies to overturn the will of voters in 2024.

    With the next presidential election in mind, Democrats have prioritized gubernatorial elections in the closely fought states, including Michigan, Arizona, Pennsylvania, Wisconsin, and Georgia, where Trump tried to jawbone legislators and other high-ranking officials into overturning his defeat in 2020. They’ve also steered donations to long-neglected secretary-of-state races in some of those same battlegrounds. But the looming Supreme Court ruling in Moore v. Harper has, for some Democrats, turned the fight for state legislative control into the most pivotal of all. “A single state legislative race in Michigan or Arizona could well prove more important to our future than any congressional or U.S. Senate race in America,” Daniel Squadron, a co-founder of the States Project, told me.

    Squadron’s group is spending $60 million to back Democrats in state legislative races in just five states, in what it is calling the largest investment by a single outside organization ever for those campaigns. The effort is in part designed to counter what has historically been a significant GOP advantage, led by the Republican State Leadership Committee and major conservative donors, such as the Koch family.

    Precisely how realistic the States Project’s goals are, and where Democrats should be spending most heavily, is a source of some debate within the party. In Arizona, a swing of just more than 1,000 votes in the State House and 2,000 votes in the State Senate would have flipped those chambers to Democrats in 2020, and the party needs to pick up only one or two seats this year to win majorities. But Arizona’s maps became more favorable to Republicans in redistricting, and the Democratic Legislative Campaign Committee—the party’s official state legislative arm—views winning majorities there as a relative long shot, especially during a difficult midterm year in which Democrats typically lose seats. The DLCC is instead more focused on protecting Democratic incumbents in Arizona and defending the party’s narrow advantages in states like Colorado and Nevada. Jessica Post, the committee’s president, acknowledges that there is a “philosophical difference” between the DLCC and some of the outside progressive groups.

    “We think that the playing field is wider than simply flipping three battleground states,” Post told me. “We think that we have to protect Democratic majorities across the country.” The States Project is also investing in a few states where Democrats narrowly control the legislature, including Maine and Nevada. But Squadron defended the decision to play offense elsewhere, noting that swaying state legislative races costs “a fraction” of what it does to influence statewide and national elections. “It’s necessary,” he said. “The stakes are high enough that whether the odds are low, medium, or high, we have to take this on.”

    There is widespread agreement, including among Republicans, that the Michigan State Senate is in play, and that the race in the Thirty-Fifth District could be decisive. “There’s no question things are tight right now,” Gustavo Portela, the deputy chief of staff for the Michigan Republican Party, told me. GOP candidates are focusing their campaigns heavily on inflation, he said, though he noted that the new maps tilt toward Democrats and that Republicans currently lag them in fundraising.

    Campaigns and outside groups are running TV ads in some districts, but the candidate who wins a state legislative race tends to be the one who knocks on the most doors. McDonald Rivet is facing a Republican state representative, Annette Glenn, who supported Trump and called for a “forensic audit” of the 2020 election in Michigan, which Joe Biden won by more than 150,000 votes. (Her campaign did not respond to requests for comment.)

    With an army of about 100 volunteers, McDonald Rivet told me her team has already knocked on more than 30,000 doors. Many of the people who answer cite worries about kitchen-table economic issues, or schools, or health care, or abortion—the topics you’d expect voters to bring up. But a surprising number, McDonald Rivet said, express unprompted concern about the future of American democracy, about whether election results will be respected. “I often hear people say, ‘I never thought I would question the health of democracy,’” she said. “‘These are things I have taken for granted my entire life.’”

    Protecting democracy is just one of the many issues McDonald Rivet highlights when she talks with voters, either at their homes or during the small meet-and-greet events she holds in the district. But she, too, is worried. Michigan Republicans have nominated election deniers for both governor and secretary of state. McDonald Rivet told me that some Republican candidates for the state legislature have stated publicly that the only electoral outcome they would accept in 2024 is a Trump victory.

    When I asked Portela whether a Republican legislative majority would honor the result of the popular vote for president, he twice dodged the question. “That’s nothing but fear-mongering from Democrats who are desperate,” he replied. “That’s not what’s at stake right now.” Perhaps he’s right. But to Democrats, it’s the evasiveness, the refusal to affirm a fundamental tenet of American elections, that suggests they are right to worry.

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    Russell Berman

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