The past eighteen months have been tough on musicians for a variety of reasons, but now is a great time to get some intelligent financial planning done before touring goes into hyper-speed in 2022 and opportunities to make changes to a financial plan become difficult as availability becomes limited. Some musicians are fortunate to have a support team of business managers, attorneys, and advisors in their corner, helping to make recommendations and give advice about building multi-generational wealth, but as you know, this process can be time consuming and often, the artist doesn’t have the bandwidth to implement the changes in their fast-paced world.
Musicians often talk about their desire to get their estate in order, start a foundation, gift money to their heirs and reduce tax implications, but enacting these strategies can be difficult to kickstart and it can be confusing how to take the first step. With tax changes on the horizon and a bit of a lull in the touring landscape, here are five smart moves musicians can make before they hit the road again in the next few months.
Build a Budget
The best way to start is to get a good understanding of inflows and outflows of cash. Musicians have big swings each quarter on inflows, from royalties, ticket and merch sales and even publishing deals. A good strategy is to average a musician’s annual income over the past two years to get a grasp on what future income may look like.
Building a budget, even if elementary, will shine a light on where some expenses can be trimmed, and savings can be increased. You may have clients that overspend on discretionary items, hotels, and tours, so finding those areas where some cash can be muted is a good start. Once you can find where money can be saved, discuss a strategy for re-deploying those savings to things like a qualified retirement plan (which in turn saves the musician on taxes), general investing accounts, paying down debt, or tackling payments owed to managers, attorneys, and vendors.
Convert to a Roth IRA
Over time, traditional retirement accounts can accumulate to significant values. Remember, even though the musicians received a tax deduction on those contributions, the entire account will be subject to ordinary income taxes at the time of withdrawal, a potential 10% penalty if withdrawn early, and RMDs at age 72.
|Rate||Single||Married Filing Jointly||Head of Household|
|10%||Up to $9,950||Up to $19,900||Up to $14,200|
|12%||$9,951 to $40,525||$19,901 to $81,050||$14,201 to $54,200|
|22%||$40,526 to $86,375||$81,051 to $172,750||$54,201 to $86,350|
|24%||$86,376 to $164,925||$172,751 to $329,850||$86,351 to $164,900|
|32%||$164,926 to $209,425||$329,851 to $418,850||$164,901 to $209,400|
|35%||$209,426 to $523,600||$418,851 to $628,300||$209,401 to $523,600|
|37%||$523,601 or more||$628,301 or more||$523,601 or more|
We are in a HISTORICALLY low ordinary income tax environment, take advantage of it! Taxes have nowhere to go but up over the next twenty years. When taxes go up, if the artist takes withdrawals from the Traditional retirement account(s), they may be paying more in taxes in the future, then they would be today. There is a strategy called a ‘Roth conversion’, where a person can convert their traditional retirement assets to Roth assets today and pay today’s tax rates on the asset, in-turn allowing the new Roth account to grow tax-free forever. Remember, a Roth IRA or Roth 401(k) allow you to save money after-tax, meaning you do not get any tax deduction in the year you make the contribution, but the account is completely tax free at retirement. A traditional IRA or Traditional 401(k) allows you to take the tax deduction each year on your contributions, but then you are on the hook to Uncle Sam when you make withdrawals.
You have two options when converting your Traditional assets to Roth assets; either pay the tax out-of-pocket at the time of conversion, or withhold taxes from the account at conversion, so not to have to dip into your own savings to cover the taxes.
Capture Unrealized Gains
When you invest in stocks, ETFs, Crypto and other assets, you can generate capital gains if you benefit from growth. Capital gains are treated as either short-term or long-term. Short-term gains are always taxed as ordinary income, but long-term gains, have benefited from preferential tax treatment, being taxed at a lower rate than ordinary income. That is all about to change. An intelligent strategy to consider is paying your long-term capital gains today on assets that have appreciated in value, capturing the current LTCG rates before they increase. Currently, the top rate on LTCG are set at 23.8%.
In 2022 and for the foreseeable future, LTCG could be going to be going up as high as 43.4%. So, if you have highly appreciated assets you have been sitting on, why pay 43.4% down the road when you can pay 23.8% today? Sell those assets, pay the tax, and reinvest the proceeds into something new which resets the capital gains implications.
The music industry is the poster child for poor estate planning. Each time we lose a famous artist, it’s almost inevitable we find out a month later they died intestate, and the family is suing one another for rights to the artists assets and IP rights. Paying an attorney to take care of estate planning is like paying to re-do your roof on your house, it’s not sexy, but it is imperative to keep your ‘house’ in order. Sure, it may run an artist $10,000 to put together an intelligent estate plan, but the amount of heartache and pain it will save their loved ones down the road is beyond measure. An attorney will provide an artist with a living will, durable power of attorney and last will and testament, along with perhaps some trust documents like a revocable trust and/or irrevocable trust.
Every person has different considerations when completing an estate plan: do their children need a trustee to manage assets because they are not legal age to manage their own money, are their friends, family or exe’s who need to be taken care of, are their debts to settle? There are hundreds of different items which need to be considered and a good estate planning attorney will ask the right questions, to ensure a proper plan is in place.
Charitable/philanthropic giving serves a few purposes, the two big one’s to consider are tax savings and personal ethics and morality. From a pure tax perspective, a person can deduct charitable and philanthropic contributions (donations) from income in the year they make the gift, lowering tax implications. This is a huge benefit in years an artist has large liquidity events like a catalog sale or publishing deal. Second, giving to charity is something which should be strongly considered if an artist has the means to do so. Perhaps they have specific causes they care about – giving to those in need is a great opportunity to support others.
A strategy which can be considered is what is called a ‘Donor Advised Fund’. This is effectively an investment/savings account which a person can gift money to every year, and then deploy at their will with no time limitations. Let’s say someone wants to give $25,000 this year to charity, but doesn’t have cause lined up, or an organization setup yet, they can gift the money to their donor-advised fund, receive the tax deduction and then later gift money from that account to the cause of their choice.
Julian Schubach – Vice President, ODI Financial
Julian serves a broad range of creative clients including artists, entertainers, and digital influencers, providing comprehensive financial education, planning, and wealth management. Julian’s clients include multi-platinum selling musicians and producers, award winning actors, directors and choreographers and best-selling writers. In addition to his private client work, Julian provides financial education and literacy seminars to arts grant recipients and clients of arts non-profit organizations.
Julian has been named a ‘Top-100 Financial Advisor’ by Investopedia and in 2018, Julian was a contributing writer for New York Foundation for the Arts book, ‘The Profitable Artist,’ penning three chapters focusing on personal finance for creatives.