future taxes

The economy is doing well by many measures. Every small rise in GDP (gross domestic product, our total output of goods and services) brings us to a new record. The unemployment rate sits at a 50 year low.

Yet the federal budget deficit is in excess of one trillion dollars, a record. A massive deficit when the economy is this good is unprecedented. When the next recession strikes, we may need to spend an additional trillion dollars a year on top of the current annual shortfall.

The moral of the story: some believe that tax rates will be higher in the future.

If you have 401(k) or traditional IRA balances, you might think about converting some fraction of those balances into a Roth IRA. The downside: you will have to pay income tax on the amount you convert. The upside: once those taxes are paid, those funds will be immune from higher tax brackets later.

The future growth will also be free of tax, if withdrawal rules are followed. And Roth balances are exempt from Required Minimum Distributions, the requirement that you take money out every year after age 70.

Each of you has a different situation, different circumstances. We cannot know the future. But it makes sense to talk about and think about what may happen in your situation. A Roth conversion might make sense.

If you are in a low bracket this year relative to what you believe you might be paying later, we should talk. You can use up the lower brackets with Roth conversions instead of letting them go unused.

Clients, if you would like to talk about this or anything else, please email us or call.

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

Traditional IRA account owners should consider the tax ramifications, age and income restrictions in regards to executing a conversion from a Traditional IRA to a Roth IRA. The converted amount is generally subject to income taxation.

The Roth IRA offers tax deferral on any earnings in the account. Withdrawals from the account may be tax free, as long as they are considered qualified. Limitations and restrictions may apply. Withdrawals prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of Roth IRAs. Their tax treatment may change.

Tax reform has delivered the lowest income tax rates in many years. These relatively low rates expire after five years. This brings up a great planning opportunity. The idea is to see if converting retirement assets to Roth IRA’s makes sense.

This is a classic “pay me now or pay me later” calculation. Normally, we want to pay later. But if we might get a discount on our taxes by paying now, we need to think about it.

Just as the best time to start Social Security retirement benefits depends partly on a fact we can’t know, the date of our death, the Roth conversion calculus has to include an assumption about future tax rates.

Some believe that with the spiraling budget deficits and national debt, tax rates must necessarily rise in the future. This makes sense to us, but we really cannot know. So having some assets in Roth format and some in traditional IRA format is a form of “tax diversification.” Split the difference.

Bottom line, your tax consultant might believe you will never foreseeably get below the 22% tax bracket (for example). So if you convert to Roth at a current tax cost of 22% and you or your heirs are ultimately taxed at 22% when funds are withdrawn, you broke even. The same after-tax money is available.

It is handy to note that breaking even produces some advantages. You will have greater ability in the future to choose where your withdrawals come from, and thus manage your future tax exposure year by year. You also could take out a lump sum from the Roth to help a child or buy a boat without aggravating your taxes that year. And you may avoid Required Minimum Distributions on the conversion.

If you convert to Roth at 22% and avoid future higher tax on withdrawals by you or your beneficiaries, you gained in terms of the after-tax result.

Clients, we believe we need to have this conversation with many of you before the end of 2018. It might significantly improve your financial security (or not.) If you have questions about this or any other topic, email us or call or set an appointment.

SEE ALSO: A Less Taxing Situation https://228main.com/2018/03/05/a-less-taxing-situation/

The opinions voiced in this material are for general information only and are not intended to provide specific tax advice or recommendations for any individual.

This is a hypothetical example and is not representative of any specific situation. Your results will vary. The hypothetical rates of return used do not reflect the deduction of fees and charges inherent to investing.

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