Wealth Planning Commentary – December 9, 2024

Corporate Transparency Act (CTA)

Update The Corporate Transparency Act (CTA) includes reforms to existing anti-money laundering laws and is intended to help prevent corruption, terrorist financing, money laundering, and tax fraud. The act requires businesses to enter their beneficial owners into a database by January 1, 2025. This impacts any taxpayer that has a corporate entity, even if it is a non-operating single-member LLC.

However, on December 3, 2024, a Texas court issued a temporary injunction blocking the enforcement of the CTA. The court raised concerns about the law's constitutionality, which has paused its implementation. Those who haven’t filed may consider delaying, but we recommend preparing the documentation if the injunction is lifted.

‘Tis the Season for a Roth Conversion

Fidelity reported that an increasing number of individuals are moving forward with Roth conversions this year, with a 46% year-over-year increase during the second quarter of 2024. Many who were advised to implement this strategy years ago are now acting. Typically, there are two main reasons for performing a Roth conversion: to address income taxes and to manage estate taxes. One may find both reasons beneficial.

From an income tax perspective, converting traditional IRAs into Roth IRAs allows individuals to lock in the current, historically low-income tax rates. Additionally, the assets in a Roth IRA grow income tax-free, and withdrawals are exempt from taxes. While this may sound appealing, some hesitate when they see the projected income tax bill due to "sticker shock." Moreover, those in their late 50s or older may not see the market value of their Roth account exceed the pre-conversion amount for some time.

Individuals should consider the after-tax value of their assets, not just the pre-tax value. Unlike traditional IRAs, a significant advantage of Roth IRAs is that there are no required minimum distributions (RMDs). If the owner does not need RMDs to maintain their lifestyle, the assets may stay in the Roth and grow tax-free for heirs.

The case for Roth conversions is even more compelling from an estate tax perspective. For both traditional and Roth IRAs inherited in 2020 or later, the 10-year rule applies, requiring most non-spouse beneficiaries to withdraw the entire balance within 10 years of the original account holder’s death. In addition, non-spouse beneficiaries of traditional IRAs must take annual RMDs starting next year. By converting to a Roth, individuals can lock in current income tax rates and provide heirs with a Roth IRA that grows tax-free for 10 years after the individual's death. In contrast, traditional IRAs are subject to ordinary income tax when inherited, which could result in a substantial income tax burden for heirs.

Please reach out to your Wealth Manager with questions.