To Roth or Not to Roth

To Roth, or not to Roth. That is the question.

You see what I did there? By way of Shakespeare and his classic play “Hamlet,” I brought a little culture to the financial world. Of course, it is a question a lot of people doask, and they’re smart to do so. There’s a lot of misinformation about Roth IRAs, and I wanted to take a few moments to set the record straight.

Here’s one I see a lot: If you’re not working, you can’t have a Roth IRA. This is false. If you don’t have an income stream, sure, you cannot contribute to a Roth IRA. But you can still have one. If you have a traditional IRA, you can convert it to a Roth IRA while not employed, if you are willing to pay the tax now.

Due to President Trump’s tax reforms, right now might be your best opportunity to take advantage of the conversion process — especially if you want to save on taxes later on. If you have a gross income of $85,000 and you’re a married couple with a standard deduction of $24,000, this brings your adjusted gross income to $61,000, placing you right in the middle of the 12% tax rate for joint filers.

If you’re adjusted gross income hits $77,401 or more, then you jump up to the 22% tax rate — but you’ll only pay the 22% rate on anything you earn above the $77,401. Income below this threshold will be taxed at the 12% rate (and then you’ll pay the 10% rate on the first $19,050 of your income).

With these rates in mind, if you have a large retirement account (non-Roth IRA) and it won’t be another 10 or more years until you begin withdrawing, you’ll want to consider the conversion. As you’re income grows, so does your tax burden in retirement. This brings us to the tax time bomb, which we’ve talked about in the past.

When you turn 70 1/2, you have to start taking required minimum distributions (RMDs). When you initially start taking RMDs, you start at a rate of about 3.65%, but it climbs as you age. (At 80 it’s about 5%, at 90 it’s nearly 9%.) Couple this income with Social Security and other income streams you may have, you may inadvertently bump yourself into the next tax bracket, setting off the tax bomb.

This assumes, however, that you do not convert your retirement funds to a Roth IRA. If you did convert, you could potentially be looking at a tax savings upward of 20 to 24%. You’d pay the tax on your income now when you convert at a lower tax rate, and then that’s it. Once it’s converted, you never have to worry about taxes on that money again.

Why is this possible? We all know the government likes their tax dollars, but they also like their tax dollars now. As a result, you benefit from thinking in the long-term, which we know the government doesn’t tend to do.

The process of converting isn’t always straightforward, so if you do have questions, feel free to call us at 800-536-8907, and we can have a conversion conversation.

– Gary Mattson



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