In a lean year, entertainment Hollywood ent professionals should consider Roth IRA and Roth 401(k) conversions.

Entertainment Hollywood ent professionals should consider Roth IRA and Roth 401(k) conversions.

For people in or closely associated with the Hollywood entertainment industry whose incomes were significantly reduced during the Writers Guild of America (WGA) and Screen Actors Guild-American Federation of Television and Radio Artists (SAG-AFTRA) strikes. If you were homeless, it could be beneficial.

Consider some overlooked year-end tax planning ideas. For many professionals in and around the Hollywood entertainment industry, years of accumulating retirement assets have led to meaningful balances in IRAs, 401(k) plans, SEPs, and other pre-tax retirement accounts.

As taxable income for the tax year 2023 is likely to be substantially lower than normal, resulting in a much lower income tax threshold, it may be advisable for entertainment industry professionals to Consider a Roth conversion of some of their pre-tax retirement assets.

In early May 2023, the WGA went on strike after the guild and the Alliance of Motion Picture and Television Producers (AMPTP) failed to reach an agreement before their contract expired.

The strike was sparked by unresolved issues in negotiations with the studios, including fair compensation for writers in the age of streaming services, lack of transparency in streamers’ viewership data, and the impact of artificial intelligence (AI). are In July 2023, SAG-AFTRA announced that it, too, would strike after contract negotiations failed, citing similar concerns over streaming revenue and AI.

According to the Bureau of Labor Statistics, the economic impact of both the WGA and SAG-AFTRA strikes has been more than $5 billion, with 34,800 job losses in the motion picture and sound industries between May and August.

Employees across the industry were hit hard, as were the businesses that support them.

In a letter urging Hollywood studios to continue negotiations, California State Treasurer Fiona Ma wrote, “The effects of these two strikes have paralyzed Hollywood and reverberated across the state, causing countless Businesses, thousands of pension fund beneficiaries, and millions of Californians are affected.” The WGA strike ended in late September, and recent negotiations ended the SAG-AFTRA strike on November 9, 2023.

For those affected by the strikes, Roth’s changes may offer a small silver lining to the effect. Traditional IRAs and 401(k)s are funded before taxes are taken out, thus deferring taxes until withdrawals are made, often decades later. Roth accounts provide the benefit of tax-free growth over time, and when it comes to withdrawals, the balance is already taxed.

Converting pre-tax retirement assets to Roths allows money to accumulate tax-free in Roth retirement accounts as they grow, but results in a taxable event in the conversion year. Because taxes will be paid for the 2023 tax year when many people’s incomes are interrupted, those taxes may be at a much lower rate than expected at the time of their retirement, and future growth until then. Will be tax-free.

A Roth conversion can happen in one of two ways. Traditional Roth conversions can be done by converting Contributory IRA or IRA rollover accounts to Roth IRAs.

Another and less well-known possibility is to convert 401(k) assets that were deferred on a pre-tax basis into Roth 401(k) assets.

Under the latter scenario, the retirement plan must allow this conversion feature, which is a common benefit of many large 401(k) plans.

Because many people in the entertainment industry work for small, closely held entities, some of these retirement plans may not currently allow the Roth conversion feature. However, it is not too late to add this feature to these retirement plans before the end of the year to take advantage of the Roth conversion for 2023. It is believed that Hollywood will fully recover in 2024 and the income will return to normal. Level now is the time to act.