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.
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