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Tax Reduction - Should I Move My Regular IRA to a Roth?

Posted by Larry Jones on Apr 1, 2021 9:30:00 AM
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Tax Rates: Do you think they will be

a. higher

b. lower

when you retire?

(hint: a)

Did you pick A?

Congratulations! That puts you ahead of all those in a vegetative state or in first grade.

With government spending at unprecedented levels, and an ever increasing burden on entitlements such as Medicare and Social Security, something will have to give. Mathematics has a way of always having the last word, and no matter how much we believe that this party can go on forever, as is, it cannot.

When the Social Security tax was put in place the selling point was that these benefits would never be taxed! But guess what? Here we are in 2021 and it's possible to have as much as 85% of your benefit taxed! Ouch!

Seniors today are looking for smart tax-reduction strategies. What can you do to keep more of what you've earned?



Roth to the Rescue!

The Roth IRA was established by the Taxpayer Relief Act of 1997(Public Law 105-34) and named for its chief legislative sponsor, Senator William Roth of Delaware. Readers of this blog should take a few moments to write a letter of gratitude to Senator Roth. I'm sure he has no friends at the IRS. The rules of a Roth are simple: you contribute after tax dollars to a Roth, and any growth inside the IRA may be taken tax-free! Why wouldn't you want to take advantage of this?
 
Well, Larry, you say, "I already have a traditional IRA which has accumulated quite a value. Can I convert that to a Roth?"
 
The good news is, you absolutely can! The bad news is that you'll have to pay the taxes on the growth from the old IRA whenever you convert it. Ouch, again!
 
Does that mean you shouldn't do it? No. You just need to be smart about how you manage the conversion. Do it a little at a time to manage your tax bill. Here's some things to keep in mind:
 
  • You are effectively removing the government from being your business partner by converting from a traditional IRA to a Roth. Just like buying out a partner, you must buy off Uncle Sam. Do your conversions little by little, and pay your tax bill over time. The more time you have the better. But remember, any growth you have from now on will be tax-free. That's powerful.
  • The sweet spot for doing Roth conversions is between the ages of 59 1/2 and 70 1/2. These are the years when early withdrawal penalties don't apply anymore, and Required Minimum Distributions haven't begun. 

Setting up a conversion plan is a good idea! 



It's your retirement, not Uncle Sam's

Last time I checked, our wonderful Uncle had no job. He didn't get up at 6 AM for 40 years to get to work. You did! Converting to a Roth IRA can increase your spendable income by 15-35% after retirement. Don't be overwhelmed by the task of doing it. Yard by yard, it's hard, but inch by inch, it's a cinch! Just take it a little at a time.

Should everyone convert to a Roth? No, but everyone should run the numbers. If you're older, or very close to retirement, it may not make financial sense, but then again it may well turn out to be one of the wisest decisions you ever made.

See ya,

Larry



 

Topics: Tax Strategies

What you don't know can hurt you!

As a fiduciary I am required to always act in your best interests, and as a professional planner, it's my job to be familiar with all types of possible solutions and financial vehicles. In short, I have no interest in selling any particular product or any affiliation with a particular company. I work for my clients.

Are you:

  • concerned that your tax bill is too high?
  • tired of watching your nest egg decline by significant amounts every 5-7 years?
  • wishing you could find more free time?
  • looking for ways to help protect yourself against litigation that could destroy all you have worked for?
  • worried that Uncle Sam is going to enjoy your retirement more than you are?

If any of the above describes you and you'd like to get a question answered then just click the button below and we'll be in touch.

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