Key tax measures to take when planning for retirement
Greg Kling, associate professor at USC Leventhal School of Accounting, joined Yahoo Finance Live to discuss taxes and retirement planning.
SEANA SMITH: Professor Kling, it’s good to see you. Let’s start by talking about what people need to do to position themselves best for taxes before the last three months of the year, as President Biden presented his tax proposal. Now that we are entering the fourth quarter, what actions should people take over the next two months?
GREG KLING: Well, Seana, first of all, thank you for inviting me here today. There are really two things. One is the tried and true things tax professionals would always recommend to their clients. And then there are the things that, of course, we need to consider due to the potential new change in tax law. So just a quick discussion of some of the major changes being proposed right now is that we’re looking at a capital gains rate, the maximum rate that’s going to go from 20% to 25%. And so this is obviously worrying for some taxpayers who expect to have high capital gains.
We also have the top tax bracket which goes from 37% to 39.6%, a 3% surtax on income over $ 5 million. And one of the big controversies right now is lowering the inheritance tax exemption. So in terms of year-end planning, the proven things people would do are things like maximize your 401 (k) contribution, consider Roth IRA conversions, and just consider where your capital gains are going to fall.
SEANA SMITH: And professor, I guess you are considering specific positions right now, after a fairly volatile September, certainly a lot of uncertainties going forward, how has your thinking changed? Or has that changed at all as a result of what we’ve seen unfold over the past couple of weeks?
GREG KLING: Yeah, so that’s a great question. I mean, what I would say is you really want to know which side you’re on. If you think the capital gains rate will increase for you by 5%; maybe it will be a little less, maybe it will be around 5%, we are still wondering where this will fall, so in fact people this year might decide not to recognize the capital losses, to pick up so many capital gains this year with the anticipation that next year we might have a higher rate of capital gains.
SEANA SMITH: And professor, just in terms of the biggest mistake people make, I think that’s the number one thing people obviously want to avoid when you talk about the biggest mistake people make when it comes to things. it is about planning their retirement. What do you see as the most common thing people do?
GREG KLING: You know, it’s actually not necessarily tax-related. I would say it’s more the idea that you can do it all yourself. I think the benefits of tax and investment professionals really make a huge difference. Maybe other than that, it’s just the idea of not maximizing their available contributions, whether it’s an individual retirement account, a Roth IRA, or even participating in some sort of employer sponsored plan like a defined contribution plan, a defined benefit plan or 401 (k) plan.
SEANA SMITH: Professor Greg Kling, nice to have you. Associate Professor at USC Leventhal School of Accounting, thank you very much for taking the time and we hope you have a good weekend.