Tim Steffen: Smart Tax Moves for 2024 and Beyond

Episode Summary

Executive Summary: Morningstar hosts Christine Benz and Jeff Ptak discuss 2024 tax and retirement-planning issues with Baird’s Tim Steffen, including SECURE 2.0 changes, charitable giving, Roth strategies, investment tax efficiency, and the scheduled 2025 sunset of many TCJA provisions. Steffen urges estate-tax planning for exposed households while cautioning most people against making major income-tax decisions before legislation is clearer.

Main Topics: 2024 tax adjustments and SECURE 2.0: Inflation adjustments to tax brackets and standard deductions remain historically large. The discussion covers employer matches tied to student-loan payments and the end of required distributions from Roth 401(k)s starting in 2024. Charitable giving, bunching, and donor-advised funds: Bunching charitable contributions can help taxpayers alternate between the standard deduction and itemizing. Donor-advised funds facilitate this approach, and donating appreciated securities can avoid capital-gains tax. Potential TCJA sunset and estate-tax exposure: Many Tax Cuts and Jobs Act provisions are scheduled to expire after 2025. A lower estate-tax exemption could particularly affect couples with estates in the approximate $15 million–$30 million range; possible strategies include gifts, charitable planning, insurance, and trusts. Roth decisions and retirement-account strategies: Roth contributions and conversions depend on an individual’s income trajectory and circumstances, not a blanket assumption that Roth is always better. The post-retirement period before Social Security and required distributions can offer a lower-income window for conversions. Tax-efficient investing and account location: Asset location should reflect the purpose of holdings and their tax characteristics. Direct indexing can harvest losses to offset gains, while municipal bonds are not automatically preferable if taxable bonds provide a better after-tax yield. Other planning considerations and professional advice: The episode addresses HSA recordkeeping and eligible expenses, gifting appreciated assets, state residency changes, and how to evaluate an advisor’s tax-planning expertise amid a shortage of experienced tax professionals.

Key Arguments: TCJA sunset outcomes are uncertain and tax provisions interact; taxpayers should assess the overall effect rather than focus on one change, such as the SALT cap, in isolation. Estate planning merits earlier attention for households likely to face estate tax, but most households are unlikely to be affected. Income-tax planning for 2026 is less urgent because legislation may change before the sunset. Roth conversions are most compelling when the tax cost is temporarily low relative to the likely cost of withdrawals later; future tax rates are difficult to predict and may change again. Bunching charitable gifts and donating appreciated assets can improve tax efficiency, but the right approach depends on whether the taxpayer itemizes and what assets they hold. Tax-efficient portfolio decisions depend on the role of each investment, the account holding it, and the investor’s tax bracket; tax-free income alone does not make municipal bonds the best choice. Advisors need not personally be experts in every tax matter, but should recognize tax implications and have qualified specialists or other resources to consult.

Data Points: Approximate 2024 inflation adjustments to tax brackets and standard deduction: 5.5% - Steffen describes these increases as lower than the prior year’s but still large historically. 2024 federal estate-tax exemption: More than $13.6 million per person; more than $27 million per married couple - Steffen says the exemption could approach $15 million per person and $30 million per couple by 2026 before a potential sunset-related reduction. Potential estate-tax exemption after TCJA sunset: Approximately half the then-current exemption - Steffen illustrates that a couple with a $20 million estate could face roughly $2 million in estate tax under the assumptions discussed. Estate-tax rate cited: 40% - Applied to assets above the relevant exemption in the episode’s example of a potential post-sunset tax liability. SALT deduction cap: $10,000 - The cap on state and local income and property tax deductions is scheduled to end if the relevant TCJA provisions sunset, though AMT could limit the benefit. Potential change to marginal tax brackets: About 2–3 percentage points, with some increases of up to 4 - Steffen characterizes the possible TCJA-sunset rate increases as modest rather than enormous. 2023 employee contribution limit for 401(k)-type plans: $22,500, plus $7,500 for people age 50 or older - Cited in the discussion of after-tax contributions and potential in-plan Roth conversions. Annual gift-tax exclusion cited for 2024: $18,000 - Steffen notes that repeated annual gifts can help reduce an estate over time. Required minimum distribution ages: 73 and 75 - Steffen says SECURE Act changes extended the RMD timeline, creating a potentially longer post-retirement conversion window.

Pivotal Quotes: "It's not about the return you earn, it's about the return you get to keep." — Tim Steffen: His rationale for considering taxes and account location when building an investment portfolio. "don't try to front run the news on these things." — Tim Steffen: His warning against making premature plans around tax provisions that may be changed by Congress. "This trough period that we're talking about, the period of time after retirement and before other income starts, is a really great opportunity" — Tim Steffen: He explains why the years after wages stop but before Social Security or RMDs begin may be suitable for Roth conversions.

Implications: Listeners should revisit tax and estate plans as legislation evolves, but avoid acting on uncertain forecasts alone. Focus on personal income timing, charitable goals, asset location, and professional advice—especially if estate values may exceed a reduced exemption.