Financial Planning Changes and Updates for 2021

There are some basic updates and thresholds you need to be aware of if you’re interested in implementing the Power of Zero strategy.

The first change is that your standard deduction went from $24,800 to $25,100. This may not seem like a big deal but does mean that you can have a larger amount of money in your IRA by the time you’re 72.

The Roth IRA rules are not being changed at all, despite other account types having their thresholds changed.

There haven’t been any dramatic increases within the tax brackets yet, just the usual adjustments to keep up with inflation but there are still numbers you need to pay attention to, particularly where the 22% and 24% tax brackets start.

The 24% tax bracket is still the sweet spot within the tax code. It’s only 2% more than the 22% tax bracket but allows you to convert nearly an extra $150,000. In the grand scheme of things when we are trying to protect ourselves from the impact of tax rate risk the 24% tax bracket is an important tool.

The Roth income limit phase-out range has shifted slightly, this means that when you reach the top of that range your ability to contribute to a Roth IRA reduces commensurately. If you exceed that range your options include a backdoor Roth or a LIRP.

As we go forward into 2021 you are likely to see changes to the deductibility of your 401(k). Joe Biden plans to level the deductibility around 26%, which means that at higher levels of income the 401(k) becomes less attractive and you should forego that deduction and put that money into your Roth 401(k).

You are likely to see a change in the marginal tax rate for people making more than $400,000 per year. In an article by the Committee for a Responsible Federal Budget, they did some studies that showed that at a certain level of tax will depress economic growth. It appears that the Biden administration may have taken their cues from the study.

For example, if you live in California and add up all the taxes proposed by the Biden administration (39% Federal, 13% State, 3.8% Obamacare surcharge, +14% New Biden Tax Increase) it approaches the threshold that studies show directly impacts the economy.

We are also likely to see forgiveness of federal student loan debt up to $10,000. Other people are lobbying for up to $50,000 of student loan forgiveness.

If you have $10,000 or less in student loans, avoid making payments on those loans until the Biden administration confirms their plans over the next 6 months or so.