Should you even consider one?

Many millions of people in this country have what are known as “Traditional Retirement Accounts” such as 401k, 403b, 457, TSP, IRA, etc. Traditional means that you funded (and maybe your employer helped you as well) your retirement account with Pre Tax dollars. Meaning you were able to take a tax deferral (no it is not an actual deduction but rather a deferral) on the money contributed by you and the tax on any profits is deferred until a later date, usually many years in the future.

Basically, you are saying I won’t pay the tax on these funds today, but I agree to pay later. This could create a problem depending on what the tax rates are today vs what they might be years from now. If the tax rates go up, you will have agreed to not pay the lower rates today in favor of the possibly higher rates tomorrow.

You can defer withdrawals from these accounts until age 73.

Then you will have to start taking RMD’s (required minimum distributions) and start paying taxes on this pile of money.

These RMD’s will be added to your other income, and you will pay ordinary income tax rates. If you have job or business income, social security income, other investment income, rental income etc. that all goes on your income tax calculation for the year. The RMD’s will go on top of everything else and then based on your filing status you will pay taxes accordingly.

If you pass away (and your spouse passes away) your heirs have 10 years to exhaust your traditional accounts via withdrawals. If you have children who already make great incomes, then they will be forced to take out your money over 10 years and those withdrawals might be at the highest possible tax rates.

What some people elect to do is to strategically withdraw their traditional money during their lifetimes and pay the tax to get it out of the way and strategically manage the rates at which they will pay and hopefully reduce the overall taxes paid. They take the money and fund a ROTH IRA which is not taxable during your lifetime and tax free for up to 10 years after you and your spouse pass away.

In the example above, a successful child would mean that for 10 years that new ROTH could grow for 10 years tax free and then it could be withdrawn 100% tax free. There are factors that must be considered and that is one of the services we help our clients with during a consultation.

Depending on the situation it might not be in your best interest to do a Roth Conversion but it would always be beneficial to do an analysis to find out.

If you would like to see a customized report about a possible Roth conversion:

Contact us at wealthwithoutstocks@gmail.com and put in the subject line CONVERSION and we will reach out to you to set up an initial call to talk.