Three Planning Questions You May Be Asking Now
Given the market gyrations of the past several months, clients have been revisiting their financial plans and searching for ways to protect themselves. Below are a few questions many are asking their J.P. Morgan team.
Should I convert my traditional IRA to a Roth?
Converting to a Roth can be especially compelling in down markets when account values and the taxes a conversion will trigger are both lower. The future growth, whenever markets rebound, will be tax-free. If you believe your future tax rates will be higher, now could be a good time to convert.
However, in considering whether to move ahead, it’s important to understand that:
• Once a traditional IRA is converted to a Roth, it can’t be undone.
• Your personal circumstances should be factored into your decision making. Your life expectancy, time horizon until you begin taking required minimum distributions (RMDs), tax rate and intended beneficiary or beneficiaries should all be considered.
What are the advantages of tax-aware borrowing?
Tax-aware borrowing involves structuring a debt to optimize its deductibility as a way to potentially lower federal and state tax obligations, improve cash flow and, in the process, effectively reduce related borrowing costs.
However, it’s important to note that U.S. tax laws do not treat all interest expenses in the same way.
1. Qualified residence interest – Interest deductions for qualified residential home mortgages are currently capped at $750,000 of principal indebtedness ($375,000 if married filing separately). Thus, for those buying a more expensive home, the mortgage interest may not be fully deductible.
2. Investment interest expense – Borrowing for investment purposes is often better, tax-wise, than borrowing to purchase a home. Taxpayers are allowed to deduct investment interest expense up to the total amount of their investment income for that year. Unlike with mortgages, there is no cap on the amount of principal indebtedness against which this deduction may be taken, provided the individual has enough investment income (from all sources) to use it against.
How can I protect my retirement plans?
Big market downturns either just before or shortly after an individual retires generally are more difficult to recover from, especially if depressed assets are being used to fund lifestyle expenses. Taking one or more of these steps can help you stay the course:
1. Determine your risk capacity
2. Lean on cash for spending
3. Use leverage to your advantage
4. Implement a dynamic withdrawal strategy
Rick Barragan is the Managing Director,
Los Angeles Market Manager, for
J.P. Morgan Private Bank.
[email protected] | (310) 860-3658
privatebank.jpmorgan.com/los-angeles
Source: “Three planning questions you may be asking now,” by Sarah Backer, CFP, CPWA, Senior Associate, Wealth Planning & Innovation
