What is the Fifth Goal for 2023? Taxable Income Planning
Most adults do not think about taxes. They just endure them, pay them, and even turn the process over to a “professional.” I use TurboTax and have begun the process of filing our 2022 income taxes. While I am doing that, I am also planning our 2023 and 2024 taxes. Of course, that assumes I will be around tomorrow or in 2024. But planning is not wrong as long as I remember, “if the Lord permits and wills, then I will do “this or that.” James got that right.
“Come now, you who say, ‘Today or tomorrow we will go into such and such a town and spend a year there and trade and make a profit’— yet you do not know what tomorrow will bring. What is your life? For you are a mist that appears for a little time and then vanishes. Instead you ought to say, ‘If the Lord wills, we will live and do this or that.’ As it is, you boast in your arrogance. All such boasting is evil. So whoever knows the right thing to do and fails to do it, for him it is sin.” James 4:13-17
2023 Tax Planning goal
This goal focuses on prudent tax payments for 2023 and lower potential taxes going forward. It also provides the potential of greater tax-free income for the balance of my life and for Cindie’s life. Simply stated, the goal is to move more investments from my Traditional IRA to my ROTH IRA. I get another year to do this before the RMD’s start due to changes in the tax law. I already created a spreadsheet to help me with picking the positions I want to move.
Step One Complete
On January 19, 2023, I transferred 100 shares of VYM (Vanguard High Dividend Yield ETF) from my traditional IRA to my ROTH. On that date, VYM’s price closed below $108 per share. Therefore, I will have to pay income taxes on about $10,781. That was the value of the shares on that date. However, since that time, those same shares have risen to $110.96, or $11,096. We will pay taxes on the value of the shares on January 19, not on today’s price or next December’s price.
Furthermore, now that the shares are in my ROTH, the annual dividends on those 100 shares are currently about $325. Therefore, we have another $325 in tax free income. Remember that this continues indefinitely. So in ten years’ time it is likely we will receive at least $3,250 in tax free income. Remember too that VYM is a dividend growth ETF, so the numbers should be even bigger.
The next steps are to watch for opportunities during the balance of the year. Opportunities come when many short-term investors rashly sell good investments, and the prices of those investments drop. This reduces the “value” of the shares but makes a ROTH conversion more attractive.
In general, I look for investments that are paying increasing dividends. Therefore, stocks like SAVA, AMD, and PRPH are not candidates for the core strategy. Those are more speculative, and don’t provide the one-two punch I desire for a ROTH conversion. In 2019 I used my ROTH conversion strategy to move my shares of ABBV from my IRA to my ROTH. I did that when the price of ABBV shares were beaten and bruised. Since that time, I have received over $9,000 in tax free income from our ABBV shares. Benefit number two: the ABBV shares are worth far more than they were when I moved them.
There is yet a third benefit. I can now sell covered call options on my ABBV shares. In the last two years I have made over $1,300 in options premiums. Therefore, the total tax-free income in just the last three years is over $10,000. Planning pays and reduces taxes.
There is a fourth benefit. ABBV has a track record of increasing dividends. So even more income is likely with zero tax implications.
The goal for 2023 and beyond is to minimize income taxes and increase total non-taxed income. More retirees would benefit from this strategy, especially if they have assets in a traditional IRA or traditional 401(k).
As always, I am interested in hearing from my readers. What goals have you set for 2023?
All scripture passages are from the English Standard Version except as otherwise noted.