Wednesday, October 23, 2013

Roth IRA Conversions and Both Sides of the Fence

Whether you have been saving for 40 years or 10 years, now is the time to see if a Roth conversion is right for you. You can convert a variety of retirement accounts to a Roth IRA, depending on the plan and any limitations it might have, a traditional IRA, employer sponsored 401k and some 403b are excellent options.

Have you ever wondered if paying taxes on your IRA or 401(k) now would save you money in the future? Do you have a low taxable income this year or next year? Are you retired? If you answer “Yes” to either of these questions, then it might be time to take a look at your retirement accounts.

Let’s talk about your income now versus your future income. We all hope we will make more money in the future. For most people this is true. Professionals in their late 30’s to late 40’s should have some retirement savings socked away, and if all goes well, this is the lowest tax bracket they will be in until they retire. For those already on the other side of the retirement fence, you have your Required Minimum Distribution (RMD) and maintaining your standard of living to consider. Believe it or not, these two ends of the saving and spending spectrum are closer than you realize.

If you are in your 30’s and 40’s, would you rather pay 15% or 35% on the money have stashed now? Do you want that money you have to grow tax free (in most cases)? For example, let’s say you have $30,000 in your traditional IRA or employer sponsored 401k, tax on that now could be as low as $4,500. One thing to consider is if you do a conversion inside of your employers 401K (if it is allowed) you will have to come up with the funds to pay the taxes with your outside money; this is the conversion that has this requirement.

Let that same money grow and have your income increase and that same $30,000 could be worth $127,483 in 20 years and you could be in a 35% tax bracket. The tax on it then would be $44,619!!! You could save $40,119in taxes!! Pay tax now for the benefit of it being 100% tax exempt for the next 30 years along with the appreciation. This seems like a no brainer. Twenty years from now when you are buying that beach house the extra $44,619 would come in handy.

For those who have traversed the working years and are now setting out on enjoying the fruits of your labors, let’s make sure you have more fruit. Let’s say you have been responsible in your retirement savings and have a comfortable reserve. You have done the math and know how much you are going to need to cover your current lifestyle going forward. There are several benefits of having dollars in Roth IRAs versus Traditional IRAs. The main benefit is that unlike Traditional IRAs, which grow tax deferred and are then taxed at ordinary income rates upon distribution, Roth IRAs grow tax free and distributions are tax free for federal income tax purposes. A benefit of a Roth IRA that is often overlooked is that it does not necessitate required minimum distributions at age 70½ years of age like a Traditional IRA. As a result, Roth IRAs can be passed down to children, where they will be distributed tax free over the children’s lifetimes.

So, regardless if you are in the middle of your career or the beginning of your retirement, a Roth conversion can make the things you want in the future more attainable now. Call us and we can run the numbers and see if it makes sense for you.

Best regards,
Monica Tulley

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