~ Ed Slott, CPA
The Roth conversion strategy involves converting traditional IRA or 401(k) accounts into Roth accounts, which offer tax-free growth and withdrawals in retirement. This can be especially beneficial for those who expect to be in a higher tax bracket in retirement due to future tax increases or want to leave a tax-free inheritance for their loved ones.
Taxes have to be paid on pre-tax retirement accounts, but you don't have to use your own money for this obligation. This effectively takes the sting out of Roth conversions.
We are partnered with some of the biggest and most financially sound companies in the financial world. These companies are willing to offer substantial bonuses on deposits, which we use the offset our client's tax liability on Roth conversions. We have special software to calculate the projected taxes, the number of years to spread out the conversions and offer a variety of strategies which best suit our client's situation. With our strategy we are able to reposition our clients to avoid RMDs and future taxes and reduce their overall tax liability.
This cutting-edge strategy can potentially save individuals and families thousands of dollars in taxes and significantly increase their retirement savings. It's a game changer for those looking to secure a comfortable retirement.
Uncle Sam can tax up to 85% of your Social Security Income. Some retirees refer to this as a "double tax", since the income was originally taxed to begin with.
Provisional Income is a measure used by the IRS to determine whether and how much of your Social Security benefits are subject to federal income tax. It includes your adjusted gross income (AGI) plus certain non-taxable income and half of your Social Security benefits. Here is how it's calculated:
Deferred Retirement Income (401(k), IRA, 403(b), Pension, etc.)
+
Employment/Business Income
+
1099 Interest Income
+
Rental Income
+
Muni Bond Income
+
50% of Social Security Income
The IRS uses provisional income to determine if a portion of your Social Security benefits will be taxed:
Understanding your Provisional Income can help you estimate your tax liability on Social Security benefits and plan your finances accordingly.
Ask us how you may be able to reduce or eliminate income taxes on SSI.
The Income-Related Monthly Adjustment Amount (IRMAA) is a surcharge that people with retirement income above a certain amount must pay in addition to their Medicare Part B and Part D premiums.
IRMAA is an additional charge on top of your standard Medicare Part B and Part D premiums, based on your income. Here's how it is calculated:
2. Income Thresholds:
Understanding these brackets and how your income affects your Medicare costs can help you better plan and manage your healthcare expenses.
Required Minimum Distributions (RMDs) are mandatory withdrawals that must be taken from certain retirement accounts starting at a specific age. These rules are put in place to ensure that individuals do not defer taxes indefinitely.
Here’s a detailed overview of RMDs:
1. Applicable Accounts:
2. Starting Age:
3. Calculation:
4. First RMD:
5. Taxation:
6. RMDs for Beneficiaries:
RMDs are required withdrawals from certain retirement accounts starting at a specific age, calculated based on your account balance and life expectancy. These distributions are taxed as ordinary income and must be taken annually to avoid substantial penalties. Understanding and adhering to RMD rules is crucial to managing retirement funds effectively and minimizing tax liabilities.
The likelihood of both spouses passing away the same year is highly unlikely. Once your spouse has passed, this will substantially reduce your Standard Deduction, as you move from Married/Filing Joint to filing Single. This, along with losing one SS check and possibly a percentage of pension income, can put the surviving spouse in a financial bind.
Becoming a widow can lead to an increase in taxes due to several factors:
Filing Status Change:
Income Levels:
Social Security Benefits:
Loss of Exemptions and Deductions:
Required Minimum Distributions (RMDs):
Capital Gains and Investment Income:
Estate and Inheritance Taxes:
Overall, the change from joint to single filing status, coupled with the possible increase in taxable income and the loss of tax benefits available to married couples, can lead to a higher overall tax burden for a widow.
Without careful planning and analysis, you may unwittingly pass on a tax problem to your kids. A growing untaxed retirement portfolio could, once inherited, bump your kids into higher marginal tax rates causing them to have to pay higher taxes on their income.
Non-spousal inherited IRAs (Individual Retirement Accounts) have specific tax rules that beneficiaries must follow.
Here's an overview:
Required Minimum Distributions (RMDs):
Taxation:
No Early Withdrawal Penalty:
Distribution Options:
Special Exceptions:
Understanding these rules is crucial for non-spousal beneficiaries to manage their tax liabilities and make informed decisions about their inherited IRAs.
When the Tax Cuts and Jobs Act (TCJA) expires at the end of 2025, several changes are expected in the tax rates and brackets:
INDIVIDUAL INCOME TAX RATES
STANDARD DEDUCTION
PERSONAL EXEMPTION
CHILD TAX CREDIT
STATE AND LOCAL TAX DEDUCTION
ESTATE TAX
These changes will result in higher tax rates and lower deductions for many taxpayers, increasing the overall tax burden compared to the current TCJA provisions.
"Taxes will never be lower than what they are today."
~ David M. Walker, Former U.S. Comptroller General
Traditional and Roth accounts are two types of retirement savings options, each with distinct features regarding contributions, tax treatment, and withdrawals. Here's a comparison:
Traditional Accounts:
1. Contributions:
2. Tax Treatment:
3. Withdrawals:
4. Contribution Limits:
5. Eligibility:
Roth Accounts:
2. Tax Treatment:
3. Withdrawals:
4. Contribution Limits:
5. Eligibility:
Summary:
Choosing between the two depends on factors such as current and expected future tax rates, retirement plans, and personal financial situations.
Like traditional retirement accounts, Roth accounts also grow tax deferred. That means they grow and compound faster than taxable Non-Qualified accounts.
Tax free income has multiple benefits! See below.
Current tax rates (2024) are close to historical lows. To minimize taxes, we want to pay our taxes at the lowest rate possible. Better to pay the taxes at today's known low rate versus tomorrow's unknown and possibly higher rate.
Paying less in taxes over time increases portfolio longevity.
Income from Roth accounts are not part of the Provisional Income calculation used to determine whether/how much SSI is taxed.
Paying income tax upfront on a Roth Conversion will be substantially less than paying a lifetime of taxes on increasing RMDs.
This is one of the best ways to prevent creating a tax problem for your beneficiaries with Non-Spousal Inherited IRAs.
A Roth conversion involves transferring funds from a traditional retirement account, such as a traditional IRA or 401(k), into a Roth IRA. This process can offer several long-term tax benefits, but it also has immediate tax implications. Here’s an overview:
2. Benefits:
3. When to Consider a Roth Conversion:
4. Conversion Strategies:
5. Five-Year Rule:
6. Tax Planning:
A Roth conversion involves moving funds from a traditional retirement account to a Roth IRA, triggering income tax on the converted amount but providing the benefit of tax-free growth and withdrawals in the future. It can be a strategic move for long-term tax planning, especially in low-income years or if you anticipate higher future tax rates. Careful planning and consideration of the tax implications are essential to maximizing the benefits of a Roth conversion.
The Roth conversion strategy involves converting traditional IRA or 401(k) accounts into Roth accounts, which offer tax-free growth and withdrawals in retirement. This can be especially beneficial for those who expect to be in a higher tax bracket in retirement due to future tax increases or want to leave a tax-free inheritance for their loved ones.
Taxes have to be paid on pre-tax retirement accounts, but you don't have to use your own money for this obligation. This effectively takes the sting out of Roth conversions.
We are partnered with some of the biggest and most financially sound companies in the financial world. These companies are willing to offer substantial bonuses on deposits, which we use the offset our client's tax liability on Roth conversions. We have special software to calculate the projected taxes, the number of years to spread out the conversions and offer a variety of strategies which best suit our client's situation. With our strategy we are able to reposition our clients to avoid RMDs and future taxes and reduce their overall tax liability.
This cutting-edge strategy can potentially save individuals and families thousands of dollars in taxes and significantly increase their retirement savings. It's a game changer for those looking to secure a comfortable retirement.
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