The new higher tax rates do make the Roth a bit less attractive than it was before, and many taxpayers may crave the tax deduction of traditional IRAs - but don't rule out Roths quite yet. "I think that, for 2013, a Roth can still make sense depending on how long you have to go before retirement," says Mark Luscombe, principal federal tax analyst with tax publisher CCH. Clients who have 10 to 20 years can easily break even on the amount of tax they pay.
Further, a Roth can be done piecemeal over a number of years, depending on a client's cash flow. Or time the conversion for a year when clients might have negative income - perhaps when they're starting a new venture or experiencing a job loss. "People still think that they have to do this all at once," says Michael Goodman, president of Wealthstream Advisors in New York. "If I have someone with a $400,000 traditional IRA [and a lower income], I'll tell them we can convert 40 grand every year and keep the tax rate down."
For clients who don't qualify for a Roth contribution due to income restrictions, Brightworth's Ferris suggests a back door. She advises clients to make a yearly contribution to a nondeductible IRA, and then convert almost immediately to a Roth. Bear in mind that, by waiting too long, clients run the risk that the account has appreciated and may owe some tax.
Finally, notes Bourdon, a Roth conversion carries little risk because the IRS allows taxpayers to recharacterize a conversion within 18 months. "It gives you the benefit of hindsight," Bourdon notes. "If you do a conversion and it goes down, you can always change your mind and recharacterize regardless of tax rates."
13. GIVE ROTHS A TWIST
Don't stop at retirement planning with Roths, Yu says. They can also be used as a powerful estate planning tool.
Converting a traditional IRA or a rollover from a retirement account to an IRA means paying tax up front, with a top rate of 39.6%. After the conversion, the asset can grow tax-free throughout a client's life and later that of his or her spouse. After that, it can be passed to heirs, who will be required to take annual minimum distributions based on life expectancy.
Compare this strategy with leaving the assets in the estate and then paying estate tax, now set at 40% for estates in excess of $5 million, at the time the (presumably appreciated) assets are inherited. "You've essentially made a gift that you don't need to pay gift tax on," Yu says.
14. GIVE BIG NOW
Clients who are charitably inclined can front-load their charitable donations all at once without deciding where to direct those gifts. A contribution to a donor-advised fund - essentially a mutual fund set up for the purpose of funding charities - can be written off this year, even if donations are not made until subsequent years.
Depending on your client's income, those gifts may be subject to the new phase-out. That doesn't mean they're not worth doing, though. If the gift is large enough relative to a client's income, the deduction might be worth more in the new higher tax bracket than it was in 2012.
"This would be a good strategy for people for whom 2013 may be their last high-income year as a way to accelerate deductions," says Steffen, of Baird. "They can wait until 2014 or 2015 to decide where they want to dole out the money."
15. FACE CALIFORNIA'S TAX HIKE
As if taxes weren't high enough in California, they're going even higher. Proposition 30, approved by voters in November, tacks on an additional 1% on incomes between $500,000 and $600,000, another 2% between $600,000 and $1 million, and 3% beyond that for married couples filing jointly. (The thresholds are essentially halved for single filers.) What's more, the tax is retroactive to the start of 2012 and came late in the year, so advisors had little time to prepare.
Shifting money into tax-free California municipal bonds might alleviate some of the sting. However, California's finances are still shaky, so advisors need to be cautious about how much money they think is prudent to tie up with the state.
While onerous, Eisenberg, the Los Angeles advisor, recommends a little perspective. The tax is levied on the excess of the above amounts, not the full sum. "If somebody is making $600,000, they're actually just paying $1,000 more," he says.
Ilana Polyak,a Financial Planning contributing writer in Northampton, Mass., has also written for The New York Times, Money and Kiplinger's.