Should you consider a mini-roth conversion?

As we get to the end of the year, and you have a better idea of your taxable income for 2019, remember to consider a mini-Roth conversion. What I mean by this is to look at making sure you are taking advantage of the whole 12% bracket. This is much more likely to be useful for married taxpayers since they can have taxable income after deductions of $78,950. If you add in the standard deduction of $24,400, you can have taxable income of just over $103,000 and still be in the 12% bracket! For single taxpayers, using the standard deduction, you can have taxable income of just over $51,000 at the top of the 12% bracket.

That rate is very generous and I don’t know how long it will last. If your income isn’t over those numbers, you should look at topping it off by converting part of your traditional or rollover IRA’s into a Roth IRA. For example, a married couple with $70,000 of taxable income before deductions could convert about $30,000 into a Roth and still stay in the 12% bracket. Later, if rates are higher, they would have tax free money they could pull out, having already paid taxes at that low rate of 12%, essentially locking it in.

Of course there are caveats, and the normal Roth IRA rules about withdrawals do apply. Additionally, there is the 5 year waiting period after a conversion before you can pull out your principal without penalty. This waiting period is waived if you are over 59.5 years of age. For younger investors looking to spend retirement money earlier than 59.5, this does create an interesting opportunity.

Let’s take the example of someone who is 40 years old and is looking to retire at 50. If they have accumulated significant traditional IRA savings, touching that money before 59.5 without penalty is a nuisance. If we continue our example of the couple who has $70,000 of taxable income before deductions, they could start converting $30,000 per year into a Roth IRA from the age of 40 to 50. By the time they got to age 50, they would have $300,000 of principal in their Roth. Of that, about half of it would be accessible without taxes or penalty, and another $30,000 would come available each year until they got to 59.5, where the remaining balance would be accessible tax free. They would be bypassing the 10% penalty rule in essence, and that money would have only been taxed at 12%, a pretty sweet deal!

As always, make sure to consult with your tax professional before starting this, but the deadline is December 31st for this tax year to start that 5 year rule ticking, so it’s time to start thinking about it. It’s also probably a good idea to get it done by December 15th to make sure there’s time for paperwork etc.

Take Advantage of Today’s Tax Rates with the Mini-Roth Conversion

In today’s blog post and video, we break down the correct way to take advantage of Roth conversions using today’s tax rates.

In our last video on Roth’s we talked about how doing large Roth conversions can be a disaster as it can severely increase your taxes.

Today we wanted to talk about when it actually makes sense.

The reason is simple, with today’s tax rates being the lowest we’ve seen in a while it may be advantageous for you to use the Roth conversion up to your current tax bracket.

If there is one nice thing to have it’s multiple buckets of money to pull from with different tax implications.

Ready to break it down? Watch the video to learn more.

Let’s recap:

Roth conversions can make sense to “make the gap” between your current income and the next level up when tax rates increase. For example, if you’re income was at $70,000 it might make sense to convert $30,000 in order not to bump up your tax rate.

You most likely can’t touch the money for 5 years but it can be beneficial down the road to have a tax free bucket of money to spend or pass along to your heirs.

Today’s tax rates could be going away soon. Don’t wait until it’s too late to take advantage of these conversions and make sure they’re done right.

  1. Planning for taxes is one of the most overlooked areas of financial planning and we want you to take advantage of it whenever possible.
  2. Roth conversion could be that advantage in today’s tax environment.
  3. If you need planning your retirement income and need to learn an often underutilized strategy, then head on over to our eBook and download it today.

You can go pick up a free copy by using the link below:

http://ironwoodfinancial.com/ebook-01-new

Like always, if you’re facing retirement and need a second opinion learn about what makes us different, we’ll audit your entire strategy to make sure you have the right tools to make your retirement as low risk as possible and still drive in a good income.

And if you want a further dive into some of the biggest risks with retirement planning then check out our webinar or download our ebook on taking income in retirement.

Should you do a Roth Conversion?

Ever wondered if a Roth conversion could help you get a “tax-free” retirement?

When the Roth conversion came out it was all the rage. Advisors and investors clamored to take advantage of the tax loophole and jumped on the bandwagon thinking they “gamed” the system.

Then they got their tax bills…

If you’re like most people we talk to on a regular basis then you’ve most likely heard from other advisors talking about a “tax-free” retirement. The biggest tools being used by said advisors is either the Roth conversion or cash value life insurance (which we’ll talk about later). And while the Roth conversion isn’t inherently bad it almost always comes with many unintended consequences that shock people when they get their taxes done.

Here’s the problem:  Many of the people who do Roth conversions today don’t actually end up saving any money in the long run.

That’s why we’re on a mission to educate retirees in Tucson about retirement and all the hidden “little things” that eat away at the return and put your retirement at risk.

On today’s agenda:  The Roth Conversion

To make it easy, we shot this quick video that explains the good, the bad, and the fine print…

Let’s Recap:

  1. If your tax rate will be lower in retirement than it is today, you may want to avoid them.
  2. When you pull the money out you’ll most likely have to pay the tax bill from other accounts.
  3. If you pay the tax bill from an IRA you may also pay even more in taxes…
  4. If you’re in your lowest tax bracket years then ROTH 401(k)’s and ROTH IRA’s make the most sense.
  5. Convert small chunks up to the next bracket in income to safely use this strategy.

No matter the approach or strategy you need to know the good AND the bad and what long-term consequences you’ll face if you pull the trigger.

That’s why we caution jumping into a Roth Conversion without doing the research or meeting with a CPA who can walk you through the benefits and risks step by step.

Like always, if you’re facing retirement and need a second opinion learn about what makes us different, we’ll audit your entire strategy to make sure you have the right tools to make your retirement as low risk as possible and still drive in a good income.

And if you want a further dive into some of the biggest risks with retirement planning then check out our webinar or download our ebook on taking income in retirement.