Many areas are preparing for a Democratic candidate to win the 2020 Election and your taxes could look very different in the near future.
- Taxes are at the lowest rate seen in years
- New models are indicating a Democrat victory
- After-tax 401(k) contribution and Roth conversions makes sense right now
Taxes and the Election
On Dec. 31, 2025, President Trump’s tax cuts expire and President Obama’s American Taxpayer Relief Act of 2012 will go back into effect. However, if Joe Biden wins the election and the Democrats take over the Senate, this rollback may happen as early as next year. This means the current tax situation may have American businesses and citizens alike paying less than they would should the cuts expire.
What does this mean for the population? Well, an individual making around $80,000 is in the 12% tax bracket this year. However, if the tax brackets are rolled back, that same person would be in the 25% bracket.
Further, Mr. Biden would look to increase the capital gains tax to equal that of ordinary income to 39.6%. That’s nearly double the 20% as it stands right now.
Any way you look at it, taxes will be going up. For all Americans.
Coronavirus and the Election
The 2020 election and your taxes are inextricably tied together, but one of the biggest factors affecting your portfolio may still be coronavirus. While it is under 100 days to the 2020 United States presidential election, it is still too early to declare a winner. However there is enough COVID-19 pandemic and civil unrest to spark concern in taxpayers and businesses.
The government is doing all it can to stimulate the economy, in the form of stimulus checks, expanded unemployment and legislation doling out trillions of dollars. Of course, the population will have to pay for this at some point. Inflation concerns are real and rising taxes is a certainty. What can you do about it now?
Roth to the Rescue
One of the best ways you can defend against the potential for higher taxes that might be coming your way is to be proactive. You may choose to contribute to an after-tax 401(k) plan and pay lower taxes. Better yet, if you have savings in a traditional IRA, you may choose to convert to a Roth IRA. Pay the lower, known tax rates now on the money you convert and never worry about taxes again. All qualified distributions from a Roth IRA are always tax free.
If you are over 70½ you can make a qualified charitable distribution of up to $100,000 every year from your traditional IRA. This will lower your required distributions (RMDs) and might help keep you in a lower tax bracket.
A Roth IRA can help out investors by providing access to the money after it’s been taxed already. Roth IRAs are similar to traditional IRAs, with the biggest distinction between the two being how the way that they are taxed. Roth IRAs are funded with after-tax dollars but the contributions are not tax-deductible. As mentioned though, investments grow tax-free.
Self-Directed Roth IRA
The Self-Directed Roth IRA allows self-determination of investments for the investor him- or herself. This means they can invest directly in whatever they know best, with a number of popular options. Because you’re paying taxes on funds going into your account, you can rest easy knowing that your distributions, when you take them, will be tax-free.
Real estate is the most popular investment for self-directed retirement account holders, and is a tangible way to diversify holdings. Real estate markets are not affected by economic fluctuations in the same way that the stock market and many traditional investment opportunities are. Some real estate ideas include raw land, condos, commercial real estate, and multi-family homes, all of which can bring a great return.
Gold and silver have continued to rise during the COVID-19 pandemic. Many investors flock to precious metals during times of financial instability. This generally drives the price up and is used as a hedge against future inflation. It’s important to note that metals held within a retirement plan should be held by someone other than yourself.
Cryptocurrency can be another opportunity for investors with a Self-Directed Roth IRA. Treated as property by the IRS, Bitcoin and other cryptos also have vast potential, and many advisors expect them to continue to be strong. Many investors see crypto as “the currency of the future” and it has grown in popularity among Millennials, as they feel more confident making cryptocurrency investments over stock market investments.
Of course, they are still highly volatile and very risky. For many investors, the risk is just too great. It’s important to work with a financial planner to determine how much, if any, you should invest in cryptos. Many experts agree that at least a small percentage of your portfolio should be help in this digital currency.
Election of 2020
While there are fewer than 100 days until the United States presidential election, many polls, pollsters, and predictive markets see a swing away from the current president, and that could extend to a blue wave in voting on all levels of government. While it does not necessarily follow that there should be panic, there can be some level of concern, which is natural.
Whatever happens in the general election, sweeping changes are a possibility with a Democratic win. This means it pays to be prepared and save yourself what money you can before having to deal with changes.