Tags: roth | ira | retirement | conversion

3 Reasons to Consider a Roth Conversion for Your Retirement

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By    |   Tuesday, 24 Oct 2017 08:54 AM

We strongly encourage our clients to consider Roth conversions before the end of the year as a part of a larger conversation about tax planning.

Depending on your income and tax situation, it may or may not make sense for you. Unlike traditional IRAs and 401(k)s where taxes are deferred until money is taken out of the accounts, Roth IRAs work the opposite way.

Taxes are paid as money goes into the account and as money is withdrawn, money comes out tax free. We like building Roth IRAs as a separate pocket of money to be drawn from during retirement.

Prior to December 31 we do tax planning to see if there’s anything we can do to minimize our clients’ taxes for the year. Roth conversions, charitable giving and maxing out medical deductions are some examples of things that must take place before the end of the year to affect your taxes.

To decide whether a Roth conversion makes sense for you, consider these things:

  1. Your adjusted gross income
    Look at line 43 of your 1040 tax form. After all your deductions have been considered, this is the number from which your tax bracket will be based. We don’t want anyone to do a Roth conversion and be bumped into a higher tax bracket.
     
  2. Your age
    Usually the younger you are, the more advantageous a Roth conversion will be because you’ll have a longer period of time before needing to draw from your Roth IRA. We think of it like paying taxes on the seed of the investment rather than the whole harvest. If you’re close to retirement or you’re already retired, you might still benefit from a Roth conversion, but it still depends on how far you are away from using that money.
     
  3. If you are in your peak earning years
    This one is very similar to the point about your adjusted gross income. If you’re in your peak earning years, you’ll likely be in a higher tax bracket than any other time in your life. You want to pay taxes when they’re on sale, rather than when they’re at a premium in your circumstance.

Another interesting thing to consider is that as the federal government considers tax reform, it might make sense to wait to do Roth conversions until the new tax brackets are revealed.

At that point, we’ll likely be very aggressively encouraging our clients to take advantage of the tax environment and convert as much as they can. Each administration only gets a maximum of 8 so while we may see lower taxes during one administration, the next administration could raise them up.

We encourage people to seek the help of a qualified financial adviser and CPA to discuss your specific situation.

Jeff Dixson is known as “The Retirement Coach” and is the founder and president of Northwest Financial & Tax Solutions, Inc. A respected financial educator, Jeff hosts a weekly radio show that airs on seven stations and is author of Winning The Retirement Game.

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We strongly encourage our clients to consider Roth conversions before the end of the year as a part of a larger conversation about tax planning.
roth, ira, retirement, conversion
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2017-54-24
Tuesday, 24 Oct 2017 08:54 AM
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