Greetings! I trust that this will find you well and enjoying life.
Often in this newsletter we look at ways to reduce taxes. Today I want to talk about actually paying more tax intentionally because of a Roth IRA conversion. When you convert your traditional IRA to a Roth, you pay taxes in your tax bracket on the amount that you convert.
You might be asking why I would want to do that? Isn’t the whole idea of putting money into a tax-deferred IRA to avoid taxes as long as I can? Well yes and no depending on your circumstances. Depending on the size of our IRA, when you are forced to begin to take RMD’s (required minimum distributions) at age 72 you may experience added cost beyond the tax on the distribution. The amount of RMD you withdraw may cause you to be pushed into a higher tax bracket or subject you to Medicare surtax and increased Medicare premiums. Therefore, in the years leading up to beginning to have to take RMD’s, you may want to convert a portion of your traditional IRA each year and pay the taxes in that year to minimize the effects of having to take a greater RMD down the road. Each year you could convert only an amount up to just below where you would go into a higher bracket and not increase your effective tax liability.
Another good reason to own a Roth over a traditional IRA involves legacy. A Roth is a much more valuable asset to pass on to your heirs because they inherit a tax-free asset. So, if you don’t necessarily need your IRA to sustain your lifestyle, you certainly should consider converting an amount each year up to just below going into a higher bracket. Even though you won’t be around to be thanked when they receive it, your kids will certainly thank you for it.
If I can answer questions about the above or be of service in any way with your planning, don’t hesitate to call.
Jeff Christian CFP, CRPC
The difference between a successful person and others is not a lack of strength, not a lack of
knowledge, but rather is a lack of will.