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Tax-Free Abundance

Jonathan Clements

I HAVE A CONUNDRUM: In 2023, I’ll have ample opportunities for tax-free growth—but probably not enough cash to take advantage.

It doesn’t get much better than tax-free, right? I remember the excitement when Roth IRAs came into being, thanks to 1997’s Taxpayer Relief Act. But today, the Roth is just the tip of the tax-free iceberg. Indeed, for 2023, I’m eyeing four tax-free accounts.

I want to fund a health savings account and my solo Roth 401(k), while also stashing more money in a 529 college savings plan for my two-year-old grandson. On top of all that, I plan to convert part of my traditional IRA to a Roth, which will mean writing a large check to Uncle Sam to cover the conversion tax bill. Add it all up, and I might need some $70,000, with $14,000 going to Martin’s 529, $4,850 to my health savings account, $30,000 to my solo Roth 401(k) and perhaps $20,000 to cover the tax bill triggered by my Roth conversion.

I could put more than $14,000 in Martin’s 529. But I promised my daughter and son-in-law that I’d build up the account to $50,000. Another $14,000 will fulfill that promise, while also earning me a Pennsylvania state income-tax deduction. Beyond $50,000, the account’s growth will hinge on the savings habits of Martin’s parents and the kindness of the financial markets.

Meanwhile, in 2022, I converted $80,000 from my traditional IRA to a Roth. I hope to convert a similar sum in 2023, but it’ll depend on my total income for the year and hence what my marginal income-tax bracket will likely be.

But it isn’t just the allure of tax-free growth that’s got me excited. I also want to fund these accounts as early in the new year as possible. To be sure, that didn’t work out so well in 2022. Still, investing earlier in the year is usually a good idea because financial markets trend higher over time, and it seems especially appealing in 2023 because stocks and bonds are already at depressed prices.

There remains the small issue of rustling up that $70,000. I don’t currently have that sort of cash sitting in my taxable account—or, to be more precise, I won’t after paying for a big remodeling project I have planned for next year. But I’ll do the best I can. Step No. 1: On Jan. 3, I’m planning to make a $50,000 Roth conversion. Let’s hope it’s a down day in the stock market.

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