One of the things we strive to do is figure out how your wealth might work more effectively for you. Investing is only part of it. There is an opportunity that may help some pay lower lifetime income tax and have greater flexibility with their cash flow.
Many of our clients in or near retirement have considered the possibility of converting retirement balances into Roth IRA accounts.
1. Roth IRA’s do not have Required Minimum Distributions beginning at age 70 ½. Other retirement accounts do.
2. Ordinary withdrawals from Roth IRA’s are usually not taxable either to their owners or beneficiaries.
3. Once income tax is paid on converted amounts, no income tax will ever land on those amounts or the income they produce, ever after.
A nearly-retired client with large retirement balances asked us a great question the other day: “Does the new tax law change the calculation on Roth conversions?” We knew from work we did late last year that the situation had likely improved for most people.
We just did not realize how dramatic the change might be. It matters because income tax is paid on converted amounts.
The silver lining right now is that the pertinent tax brackets may be lower now on larger amounts converted. In 2017, singles and couples hit the 25% bracket beginning at about $38,000 and $76,000 of taxable income. But for 2018, the 24% bracket does not come into play until around $82,000 (singles) and $165,000 (couples).
No one on the planet can prove that a Roth conversion will or won’t make sense for you—it requires a detailed knowledge of the future, which we do not have. But for people with large traditional retirement account balances, a planned series of Roth conversions may provide a form of tax diversification.
By having funds in both traditional and Roth accounts, you may have greater flexibility to manage your cash flows and tax brackets more effectively.
Here’s the kicker: the low income tax brackets expire after five years. This may be a fairly short-term opportunity.
Clients, if you would like to talk about this or anything else, please email us or call.
The opinions voiced in this material are for general information only and are not intended to provide specific individualized financial or tax advice. We suggest that you discuss your specific situation with a qualified financial or tax advisor.
All investing involves risk including loss of principal. No strategy assures success or protects against loss.