roth conversion

Catch-Up > Ketchup

graphic shows a piggy bank looking on curiously at a bottle of ketchup

These two terms may essentially be homonyms, but one is so much greater than the other. Kiddos sometimes choose huge portions of the condiment ketchup. But beyond a sugar-fueled addiction for dipping our fries in that one is a great opportunity to “catch up” on our IRA contributions.

In the world of IRAs—Individual Retirement Accounts—we consider the beginning of January through tax filing day “catch-up season.” Whether Roth or traditional, if we are eligible to make contributions, then we can catch up on last year’s contributions even though the last calendar year is over.

Those just learning about the power of Roth IRAs can use this season to make two years’ worth of contributions at once. Even with the federally-mandated limits, you can contribute thousands of dollars in standard contributions. And for people who turned 50 by year-end, there is an extra “catch-up” contribution option.

Consider even just the standard contribution limits. Imagine if you had $15,000 in a regular account (in which you pay tax on earnings) and were eligible to contribute to a Roth IRA for both this year and next year. If you won’t be spending that money in the next few years, the question comes down to whether you would like to never pay tax on earnings on that money–ever again, for the rest of your life.

If that value were to double over the years and double again, as sometimes happens with long-term investments, there might be $60,000 available later with zero tax. After five years your contributions can be withdrawn without tax. At the later of five years or age 59½, the earnings may be withdrawn without tax too. And if you didn’t withdraw it, your beneficiaries would receive it, free of income tax.

No guarantees, of course: the markets go up and down.

There is a maximum earnings limit on Roth contribution eligibility, and there is a whole world of other lifetime tax reduction strategies related to Roth conversions. We’d be happy to visit with you about your eligibility. Simply email us or call if you have an interest in learning more.

For now, happy catch-up season, one and all!

A Roth IRA offers tax deferral on any earnings in the account. Qualified withdrawals of earnings from the account are tax-free. Withdrawals of earnings prior to age 59½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Limitations and restrictions may apply.

Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss.

This information is not intended to be a substitute for specific individualized tax or legal advice. Neither LPL Financial, nor its registered representatives, offer tax or legal advice. We recommend you discuss your specific situation with a qualified tax or legal advisor.

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THREE LITTLE WORDS YOU MAY NEED TO KNOW: Required. Minimum. Distribution.

If you are of a certain age and have certain retirement accounts, you probably need to know about the annually required withdrawals from those accounts. The IRS calls them “Required Minimum Distributions”—RMDs.

One special note: Clients, many of you are already treating your retirement account like an orchard, taking out the fruit crop each year to live on. The RMD is not an “extra” amount on top of the crop: it is just a minimum. If you are already taking out 5% in monthly payments to fund your retirement, you don’t need to worry about what happens at age 73.

We’ll talk about the details here, then how it works out in practice.

People born in or before 1950 with any form of retirement account (other than Roth IRA) have already begun doing this RMD process each year (or should have). People born in 1951 or later will have to begin by the year they turn 73.

Basically, the RMD needs to be calculated for each retirement account you have (except Roth IRAs). You must take out the total amount required by December 31, and you will receive a 1099-R showing taxable income.

Clients, you know we pay attention to this and strive to keep you informed about what needs to be done. But there’s one thing to be careful of: take this as an opportunity to check whether there is some account somewhere that we don’t know about, like a 401(k) from a former employer, an odd IRA balance somewhere, 457 or 403(b) plans, and so on. It happens, but it would be a pain to get yourself into some trouble over an account that’s been out of sight, out of mind.

Some people may choose to use the onset of RMDs as a time to consolidate all of their retirement funds into a single rollover IRA, to make this process simpler going forward.

One of the advantages of Roth IRAs is that they have no RMD requirement. As a matter of good planning, it may make sense to convert partial IRA balances to Roth, pay tax when you choose, and whittle down that balance that is subject to RMDs in traditional retirement accounts.

There are lots of ways to handle things! If you’d like to talk about it, we’re here for it. Email us or call.

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

To determine which strategies or investments may be suitable for you, consult the appropriate qualified professional prior to making a decision.

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.

Traditional IRA account owners have considerations to make before performing a Roth IRA conversion. These primarily include income tax consequences on the converted amount in the year of conversion, withdrawal limitations from a Roth IRA, and income limitations for future contributions to a Roth IRA. In addition, if you are required to take a required minimum distribution (RMD) in the year you convert, you must do so before converting to a Roth IRA.

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Spicing Things Up: Catsup, Ketchup, or Catch-Up?

One of these is not about tomato-based condiments.

In the world of IRAs—Individual Retirement Accounts—we consider the beginning of January through tax filing day “catch-up season.” Whether Roth or traditional, if we are eligible to make contributions, then we can catch up on our 2024 contributions even though 2024 is over.

Those just learning about the power of Roth IRAs can use this season to make two years’ worth of contributions at once. The limit on contributions is $7,000 for 2024 plus $7,000 for 2025. Another note to know: for people who turn 50 by year-end, there is an extra $1,000 per year that can go in—a “catch-up” contribution.

Consider even just the standard contribution limits. Imagine if you had $14,000 in a regular account (in which you pay tax on earnings) and were eligible to contribute to a Roth IRA for 2024 and 2025. If you won’t be spending that money in the next few years, the question comes down to whether you would like to never pay tax on earnings on that money, ever again, for the rest of your life.

If that value were to double over the years and double again, as sometimes happens with long-term investments, there might be $56,000 available later with zero tax. And if you didn’t spend it, your beneficiaries would receive it, free of income tax.

No guarantees, of course: the markets go up and down.

The way Roth IRAs work, after five years your contributions can be withdrawn without tax. At the later of five years or age 59½, the earnings may be withdrawn without tax. There is a maximum earnings limit on Roth contribution eligibility; we’d be happy to visit with you about your eligibility. Simply email us or call if you have an interest in learning more.

There is a whole world of other lifetime tax reduction strategies related to Roth conversions; we’ll talk about those another time.

For now, happy catch-up season, one and all!

Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss.

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Catsup, Ketchup, or Catch-Up?

One of these is not about tomato-based condiments.

Those just learning about the power of Roth IRAs can use this season to make two years’ worth of contributions at once. The limit on contributions is $6,500 for 2023 plus $7,000 for 2024.

Another note to know: for people who turn 50 by year-end, there is an extra $1,000 per year that can go in—a “catch-up” contribution.

Imagine if you had $13,500 in a regular account (in which you pay tax on earnings) and were eligible to contribute to a Roth IRA for 2023 and 2024. If you won’t be spending that money in the next few years, the question comes down to whether you would like to never pay tax on earnings on that money, ever again, for the rest of your life.

If that value were to double over the years and double again, as sometimes happens with long-term investments, there might be $54,000 available later with zero tax. And if you didn’t spend it, your beneficiaries would receive it, free of income tax.

No guarantees, of course: the markets go up and down.

There is a whole world of other lifetime tax reduction strategies related to Roth conversions; we’ll talk about those another time.

For now, happy catch-up season, one and all!

Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss.

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Play the audio version of this post below:

Three Words You May Need to Know: Required. Minimum. Distribution.

We’ll talk about the details here, then how it works out in practice.

The actual amount required is a function of age and the prior year-end balance. For example, a 73-year-old has to take out a little less than 3.8%. In round numbers, this would be $3,800 per $100,000 in the account. But that fraction goes up a little every year: 80-year-olds are closer to 5%, 90-year-olds have to take out more than 8%.

Some people may choose to use the onset of RMDs as a time to consolidate all of their retirement funds into a single rollover IRA, to make this process simpler going forward.

There are lots of ways to handle things! If you’d like to talk about it, we’re here for it. Email us or call.

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

To determine which strategies or investments may be suitable for you, consult the appropriate qualified professional prior to making a decision.

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.

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Play the audio version of this post below:

It Goes Up and Down: Some Questions for a Moment Like This

graphic shows "up" and "down" on a chalkboard with checkmarks next to them

The history of the stock market can be summed up pretty well: it goes up and down. As for the future, we cannot know for certain whether it will continue to go up and down—or on what schedule—but it seems reasonable to take the liberty of guessing this whole “up and down” thing may persist.

When things are down 20% from their most recent peak, and we recognize it goes up and down, this may well be as good a time as any to invest.

We might have a recession, but current lower prices already reflect a lower outlook. You could say sentiment is already in the mix, already baked into prices. And anyway, where there’s a recession, there’s surely a recovery to follow.

Do we know the timing? Nope. But we never do. (That’s where the whole up-down thing comes back into focus.)

There is much we do not know, but we have faith that perhaps our guesses may be good enough to get by. We believe, for example, that in the future there is money to be made by companies that meet our needs. We have a hunch we will continue to eat, shop, entertain ourselves, wear clothes, go places, communicate, create, and do all those other things humans tend to do. And we have an opportunity now to invest in companies that could provide those things then.

Clients, some things to consider at such a moment as this:

Is there room to start or add to a Roth or IRA?
Should some funds in a stable-but-stagnant form perhaps be invested for long-term growth?
Would a Roth conversion make sense given these lower prices?

It goes up and down. And when we invest for the long run, we commit to the ups and the downs both. One never knows when the trend will change, just that it very well may.

If it’s time for you to add to long-term holdings, please email us or call the shop—anytime.

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Happy Roth Year!

We’ve got Roth IRAs on the brain. Why? How would you like to never, ever pay income tax on investment gains and dividends and interest on some fraction of your money? Oh—and your beneficiaries never would either. Well?

That’s the magic of the Roth IRA, properly used.

Every single person may convert existing IRA or rollover balances into a Roth IRA, by paying income tax on the converted amount. Many believe income taxes will rise in the years ahead, above the scheduled increases in the current law.

Anyone may do a conversion of the amount they choose from existing IRA or rollover accounts, although other factors determine whether you are also eligible to contribute as much as $7,000 for 2021.

Here are some reasons that people are using this technique:

It allows folks to take advantage of the perhaps low tax brackets they are in currently: why leave the 12% or 22% or 24% bracket partly unused if you believe your tax rates will be higher in the future?

It provides a bucket for your most dynamic investments, where gains will never be taxed.

It offers balance to your retirement assets, between traditional “pay tax later” accounts and Roth “pay tax now” accounts. This reduces future RMDs (required minimum distributions) and increases your cash flow flexibility.

Like so much of life, we cannot know the future, so we simply do the best with what we do know. “A little of this, a little of that” may be a prudent way to deal with uncertainty. Future tax rates, future investment results, and your future cash flow needs are all unknown. So it might make sense to take a middle-of-the road approach—and build more flexibility into your retirement situation.

Roth conversions go by calendar year, so if you would like to talk about your options, please call or email us in the next few weeks.

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Tomorrow’s Tax Rates and the Roth Opportunity

canstockphoto24680

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.

Rothify Yourself or a Loved One

The Roth IRA concept was passed into law in 1997. It may be more pertinent than ever before. You see, once dollars are placed in a Roth, all the growth is free of tax when withdrawn, as long as the account is five years old and you are older than 59 ½.

Traditional retirement savings provide a tax advantage up front: contributions are not subject to income tax. Later on, withdrawals are taxed. The conventional wisdom was that tax brackets could be lower in the retirement years, so the tax later might not be too bad.

The way things look today, we may never see lower brackets than we have today. There are reasons to think that income taxes will be rising:

• The federal income tax changes passed in 2017 were temporary, with the old higher rates coming back after five years.

• Sooner or later the government may need more revenue to deal with record budget deficits and record national debt.

So the old conventional wisdom about lower tax brackets later may no longer apply. The Roth route may be the way to go.

What does this mean?

• Anybody with earned income may contribute to a Roth IRA, even past age 70, subject to a maximum income limit.

• Some employer plans (401k, 403b etc.) have Roth-type options that many employees could change to.

• Young adults with gifted UTMA accounts or other investments could use those funds to start Roth IRA’s.

• Parents or grandparents looking to give the next generation a boost could fund Roth IRA’s for any who have earned income.

• Anybody with IRA balances may convert any amount they choose to Roth, regardless of income. The converted amounts are subject to income tax, but ever after, the Roth benefits are in place.

The tax implications of a Roth conversion can be complicated. You should seek advice from a professional tax consultant. Your own situation and views should rule any decisions you make. Since we cannot know the future, there is no way to know which path is best. Like so many things in life, we will do the best with what we know.

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

Pay Uncle Sam Now or Later

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.

228Main

News and Views from 228 Main

roth conversion

Catch-Up > Ketchup

Catch-up > Ketchup – 228Main.com Presents: The Best of Leibman Financial Services

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THREE LITTLE WORDS YOU MAY NEED TO KNOW: Required. Minimum. Distribution.

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Spicing Things Up: Catsup, Ketchup, or Catch-Up?

Spicing Things Up: Catsup, Ketchup, or Catch-Up? – 228Main.com Presents: The Best of Leibman Financial Services

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Catsup, Ketchup, or Catch-Up?

Catsup, Ketchup, or Catch-Up? – 228Main.com Presents: The Best of Leibman Financial Services

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Three Words You May Need to Know: Required. Minimum. Distribution.

Three Words You May Need to Know: Required. Minimum. Distribution. – 228Main.com Presents: The Best of Leibman Financial Services

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It Goes Up and Down: Some Questions for a Moment Like This

It Goes Up and Down: Some Questions for a Moment Like This – 228Main.com Presents: The Best of Leibman Financial Services

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Happy Roth Year!

Happy Roth Year! – 228Main.com Presents: The Best of Leibman Financial Services

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Tomorrow’s Tax Rates and the Roth Opportunity

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Rothify Yourself or a Loved One

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Pay Uncle Sam Now or Later

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Catch-up > Ketchup – 228Main.com Presents: The Best of Leibman Financial Services

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Spicing Things Up: Catsup, Ketchup, or Catch-Up? – 228Main.com Presents: The Best of Leibman Financial Services

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Catsup, Ketchup, or Catch-Up? – 228Main.com Presents: The Best of Leibman Financial Services

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Three Words You May Need to Know: Required. Minimum. Distribution. – 228Main.com Presents: The Best of Leibman Financial Services

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It Goes Up and Down: Some Questions for a Moment Like This – 228Main.com Presents: The Best of Leibman Financial Services

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Happy Roth Year! – 228Main.com Presents: The Best of Leibman Financial Services

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