roth conversion

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.

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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Tomorrow’s Tax Rates and the Roth Opportunity

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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.

A Less Taxing Situation

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.

SEE ALSO: Pay Uncle Sam Now or Later https://228main.com/2018/04/16/pay-uncle-sam-now-or-later/

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.

228Main

News and Views from 228 Main

roth conversion

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