You can’t rely on Congress to keep their word, so you must be proactive and take steps to keep more of your money. To pay as little tax as possible along the way you need to turn taxable accounts into tax-free accounts that I call "forever tax" to one’s that are "never taxed".
~ Ed Slott, CPA
EFFICIENT ROTH CONVERSIONS
We begin by completing a Roth Analysis to determine whether the client would save substantially on taxes with Roth conversions
Our software analyzes the expected taxes one will pay in retirement through distributions, RMD's, IRMAA, taxes on Social Security Income and non-spousal inherited IRA's (ten years) and compares to taxes paid on Roth conversions
If the software confirms a substantial tax savings on Roth conversions, we then analyze at what rate conversions should occur and in which tax bracket(s)
We also have Roth Conversion software to calculate taxes owed if conversions are to be completed over a period of years
We then begin to reveal several tax strategies that are available to reduce taxes on Roth conversions and determine which are appropriate for the client's circumstances
We are currently offering a complimentary Roth Analysis
One more thing…we shouldn’t think of paying the taxes on Roth conversions as a “cost”.
Rather, since the money (the tax) was never ours to begin with, it should instead be viewed as an opportunity for investment with a measurable ROI
Ask for a sample case study and the 14-page e-booklet, Efficient Roth Conversion
The Seven Risks of Traditional IRAs
1. Exposure to future tax rate increases
2. Required Minimum Distributions – that force taxation and deplete account balances
3. Payment of investing costs on money that’s not yours
4. The “Widow’s Penalty” – higher tax rates on a surviving spouse
5. Possible taxation of Social Security Benefits
6. Potential for increased Medicare premiums (IRMAA)
7. Balance passed on is taxed at heirs (likely higher) tax rate – over 10-years
Your one "get out of jail free card" is a Roth Conversion to instantly and permanently
eliminate these seven Traditional IRA risks.
benefits of roth accounts
Tax-Deferred Growth
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
Tax free income has multiple benefits! See below.
Potentially Lower Taxes
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.
May Contribute to Portfolio Longevity
Paying less in taxes over time increases portfolio longevity.
Income Not Counted In Provisional Income Calculation
Income from Roth accounts are not part of the Provisional Income calculation used to determine whether/how much SSI is taxed.
No RMDs
Paying income tax upfront on a Roth Conversion will be substantially less than paying a lifetime of taxes on increasing RMDs.
Pass Assets Tax-Free to Heirs (if you hold the account at least 5 years)
This is one of the best ways to prevent creating a tax problem for your beneficiaries with Non-Spousal Inherited IRAs.
ROTH CONVERSIONS
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:
Key Points about Roth Conversions:
- Immediate Tax Implications:
- When you convert funds from a traditional retirement account to a Roth IRA, the amount converted is treated as taxable income in the year of the conversion. You will owe federal income tax (and potentially state income tax) on the converted amount.
2. Benefits:
- Tax-Free Withdrawals: Once the funds are in the Roth IRA, they grow tax-free, and qualified withdrawals (taken after age 59½ and after the account has been open for at least five years) are also tax-free.
- No RMDs: Unlike traditional IRAs, Roth IRAs do not require Required Minimum Distributions (RMDs) during the account owner's lifetime, allowing the account to grow tax-free indefinitely.
- Estate Planning: Roth IRAs can be advantageous for estate planning since beneficiaries can inherit the account and continue to benefit from tax-free growth.
3. When to Consider a Roth Conversion:
- Low-Income Years: Converting during years when you are in a lower tax bracket can minimize the tax impact.
- Future Tax Rate Expectations: If you expect your tax rate to be higher in retirement than it is currently, a Roth conversion may save you money in the long run.
- Diversification: Having both traditional and Roth accounts provides tax diversification, giving you more flexibility to manage your taxable income in retirement.
4. Conversion Strategies:
- Partial Conversions: You don't have to convert your entire traditional IRA at once. Partial conversions allow you to spread the tax impact over several years.
- Backdoor Roth IRA: This strategy is used by high-income earners who are ineligible to contribute directly to a Roth IRA. It involves making a non-deductible contribution to a traditional IRA and then converting those funds to a Roth IRA.
5. Five-Year Rule:
- Each Roth conversion has its own five-year period during which the converted funds must remain in the account before they can be withdrawn penalty-free (if under age 59½). This is separate from the five-year rule for regular Roth IRA contributions.
6. Tax Planning:
- A Roth conversion can impact your tax bracket, eligibility for tax credits, and the taxation of Social Security benefits. It's important to consider these factors and possibly consult with a financial advisor or tax professional.
Summary:
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.