How Secure Act 2.0 Could Affect Your Retirement

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Denise Appleby was our special guest this past week. She’s our consultant for IRA and 401(k) planning, and she is an invaluable asset for our clients. However, this week she’s sharing her insights into the Secure Act 2.0, which could affect your retirement in a few significant ways.

Quick Background on the Secure Act 2.0

The Secure Act 2.0 was passed the last week in December 2022, and everyone is scrambling to:

  • Learn the rules
  • Changes that we need to know about
  • Who we need to contact

With thousands of pages to go through, the Act has a lot of significant rules that everyone needs to understand. Denise is here to help us understand some of the changes in 2.0.

Note: Even though the Act was signed very late in the year, the changes went into effect on January 1, 2023. 

Secure Act 2.0 Updates You Need to Know

Secure Act 1.0 changed the required minimum distribution (RMD) age from 70 ½ to 72. Secure Act 2.0 changes these dates further, but now there’s a calendar to deal with. If you have already reached 72 before 2023, you should be taking your RMD. However, if you turn 72 after 2022, the RMD starts at 73.

The problem is that a lot of custodians sent out letters stating that people turning 72 could wait to take their RMD until 73. Custodians simply weren’t given enough time to make changes on their end to stop these mails from going out.

What Happens If You Took Your RMD Even Though You Needed to Take It at 73 Instead?

The good news is that the distribution isn’t an “RMD” in this case. Instead, you can roll it over to next year. If you reach 72 in 2023, you have the option to roll the money that you take out.

Typically, when you take an RMD, you have to include it in your income for the year unless an exception applies.

In this case, the exception is that you can take the RMD and roll it back into your IRA or 401(k). You normally need to do the rollover within 60 days of receiving the funds. A rollover isn’t taxed, so you don’t need to claim this money. The IRS does permit a self-certification procedure that will allow for a rollover even if 60 days have passed.

There’s one issue: you can only perform one rollover per 12 months. If you rollover a traditional to a Roth account in the past 12 months, then you cannot rollover the RMD.

Missing the Deadline and an Excise Tax

Secure Act 1.0 had an excise tax of 50%. If you missed your RMD of $10,000, you would pay a 50% tax or a $5,000 penalty. Thankfully, Secure Act 2.0 has changed this excise tax to 25%. Additionally, there’s a correction period in place under the new Secure Act modification.

If you take your RMD during this correction period, you only pay an excise tax of 10%.

There’s also a chance that you can have the excise tax waived completely, and this is obviously something to pursue because you should never be paying more taxes than absolutely necessary.

We never want you to pay an excise tax. If you’re unsure whether you need to take an RMD or not, be sure to call your advisor.

Annuity and IRA Aggregation

Secure Act 1.0 states that if you have an annuity that has been annuitized and a regular IRA, you cannot aggregate these accounts. 

What does aggregation mean?

You calculate the RMD for IRA A and IRA B, and you can take the RMD that you want from these. However, in Secure Act 2.0, you can now aggregate these amounts, meaning you can aggregate your annuity and IRA now.

For many people, it’s a break if you have more than enough from an annuity and don’t need to take the RMD. Now, the person doesn’t need to take the RMD.

Designated Roth Account RMD Changes

Many people question why they need to take an RMD on their Roth accounts. Now, the beneficiary of the account needs to take an RMD but now the owner. Designated Roth accounts no longer need to take an RMD, starting in 2024.

Terminally Ill Provision

If you’re terminally ill and a doctor certifies that you have an illness that can result in death in 84 months, the 10% penalty for withdrawing funds early is eliminated under a special tax treatment.

Domestic Abuse Provision

In 2024, penalty-free distributions to anyone who experiences domestic abuse are now possible. Unfortunately, this rule only comes into effect in 2024, but it can help anyone in a domestic abuse situation find relief.

529 Provision to Rollover into a Roth IRA

One exciting change is with a 529 plan used for college savings. However, when you’re putting money into these accounts, it’s impossible to know whether the person will receive a scholarship. Under the Secure Act 1.0, any additional money left over that is not used for education expenses is subject to income tax and a 10% early distribution penalty.

A change in the Secure Act 2.0 allows you to rollover $35,000 (lifetime) into a Roth IRA account from a 529.

There are a few stipulations:

  • Annual amounts moved cannot be more than what you put into your regular IRA contribution
  • Contributions to traditional or Roth IRA must be added up to know how much you can rollover from the 529
  • Funds must be a direct transfer from the 529 account to the Roth account
  • Funds transferred from the 529 account must have been in the account for the past five years in hopes of stopping people from gaming the system

If you have the 529 company deposit the money into your account and then you transfer it to the Roth account, this will not count. You need the transfer to go from one institution to another without it ever touching your account.

Transferring the money from a 529 to a Roth account must be transferred back into the beneficiary’s account. You cannot transfer the funds from this account back into your own unless you’re going back to school and have the funds transferred to a 529 for you.

Biggest Mistakes in IRA Planning

We couldn’t help but ask Denise about the biggest mistakes she sees in IRA planning. She tells us that the biggest mistake she sees, which doesn’t happen often, is moving assets. Many people rollover their accounts multiple times in a single year, breaking the once-a-year rule for rollovers.

Once these multiple rollovers happen, it’s often too late to correct this year.

You’re allowed one 60-day rollover per year. However, this only happens if you have the check made out to you, the funds hit your bank account and then you put it into a new account via a rollover.

However, if the rollover goes from one institution to the next, such as Schwab to Fidelity, these types of transfers can happen as many times as you want.

Often, there are solutions that the IRS allows if something happens and you cannot meet deadlines. It’s important to speak to your advisor to understand your options and how you may be able to prevent penalties, taxes or other issues along the way.

Click here to schedule a call with us if you have any questions about the Secure Act 2.0.

P.S. If you want to learn more about changes to the Secure Act 2.0, head over to RetirementDictionary.com, where Denise shares her insights with readers.

Planning For Taxes in Retirement

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Filing your taxes in retirement is important. You may have worked diligently your entire life, but the IRS still wants you to pay your taxes in retirement. However, there are many ways that you can combine your tax and retirement planning to save money.

Now, if you’re stressed when thinking about this topic, don’t be.

We’re going to walk you through the documents that you’ll need to make planning for taxes in retirement as simple and straightforward as possible.

What to Do If You Have Self-Employed Income

If you’re self-employed, you’ll likely receive your 1099. A 1099 means that taxes have not been paid on these dollars yet, so you’ll need to have this document when filing your taxes. If you’re still involved in a partnership, you may receive a K1 as well.

Investments can also generate a K1.

Unfortunately, K1s often do not get generated quickly. Many people get their tax returns done, file them and then have to start all over to incorporate this form into their taxes.

If you’re self-employed, you also need to keep everything in order to claim deductions, such as:

  • Check registers
  • Credit card statements
  • Business use asset information
  • Receipts

Anyone with a home office will want to consider whether or not they want to claim their office as a tax deduction, too.

If you’ve been paying your taxes quarterly, you’ll want to gather this data to give to your CPA so that they know what you’ve paid so far. 

Ideally, you’ll keep these documents in a folder throughout the year to make tax season less stressful. If you have everything in order beforehand, you won’t have to deal with the stress of getting everything in order come tax time.

Making estimated quarterly payments online on the official IRS website will be very useful, too. At the end of the year, you can log in to the website and print off a statement showing the taxes you paid throughout the year. This will make it very easy to supply your accountant with these important figures so that you’re not paying more taxes than necessary.

Note: If you happen to file an extension, the site only keeps records for 14 – 16 months. You need to print out these payments because they will include filing dates, which need to be filed to make sure that you don’t get penalized.

Rental House Income

If you have rental income coming in, you need to keep track of:

  • Rental income and payments
  • Expenses relating to the properties

You want to keep a record of every possible expense you made relating to these assets, along with the dates of these transactions and why these expenses occurred. You will need to file these taxes quarterly, so also keep this in mind.

Retirement Income

Retirement income is going to revolve around your 1099, and there are multiple forms of this document that you need to collect before filing your taxes. Most financial institutions have all the way until the end of February to get these documents to you.

You’ll typically have a 1099 sent to your mailing address, but a lot of institutions are putting these files online for you.

If you’re currently working, you’ll also receive a W2.

The W2 will show your:

  • Wages
  • Taxes withheld
  • 401(k) contributions

If you receive income from any of the following, they will generate a 1099:

  • Pension
  • 401(k)
  • IRA
  • Social Security

These documents will show how much you withdrew within a calendar year, how much taxes are withheld and more. Collecting these files will make it much clearer how much you’ll owe at the end of the year in taxes.

Traditional IRA basis is more complicated because these are non-deductible.

It’s important to gather all retirement income-related 1099s so that you can file your taxes properly. However, there is another form of 1099s, which you’ll need to know about before filing your taxes or handing your documents over to an accountant.

Note: 401(k) rollovers to an IRA will generate a 1099. The 1099R is a non-taxable distribution, so you can rest easy that you won’t be hit with a major tax liability. It’s important to work with a professional to ensure that these rollovers are done properly so that you don’t get hit with a major tax liability.

Savings, Investments and Dividends

Your custodian, such as Charles Schwab, will send you a 1099 for money that you have in savings, investments and dividends. Most custodians will have these files for you on their online portals.

In most cases, the file is ready around February 15, but this date can vary.

These 1099s will include:

  • Interest earned for any interest-bearing accounts
  • Dividends from a stock or ETF that paid an actual dividend
  • Capital gains, whether a short-term or long-term, which have different rates

You need to ensure that you receive this 1099 before filing your taxes. If you forget about this 1099, you’ll find yourself with a huge amount of taxes that the IRS says that you owe, which will then need to be cleared up by amending your taxes.

It’s better to wait until you have all the documents before filing your taxes, or you’ll have to deal with the stress and headache of making a tax amendment.

Tax-deferred accounts, such as an annuity, will generate a 1099 if you take a distribution through the annuity. You may have to pay taxes on interest here, too.

Home Ownership

Offsetting some of your taxable income is possible through deductions. If you have a mortgage or loan on your home, you may be able to write off this interest. You want to keep detailed documentation of your real estate and property tax records, receipts for energy-saving appliances and any other 1098s you receive in the mail.

Note: A lot of these deductions that we’re talking about will require you to itemize your deductions. If you don’t itemize, a lot of what we’re talking about in this section and the next may not relate to your situation.

Charitable Deductions

If you are charitably inclined, you can make the most out of your donations by itemizing your tax returns. We do this with many of our clients by using donor-advised funds, where we combine multiple years of donations into one year.

When you use this type of deduction, you can reduce your taxes dramatically.

You’ll need to reach out to us if you want to discuss using donor-advised funds to reduce your taxes. Donor-advised funds will require you to preplan because you cannot utilize this tax strategy for past taxes.

Medical Expenses and Health Insurance

If you itemize your tax return, you want to keep track of expenses for:

  • Healthcare
  • Insurance
  • Doctors
  • Dentists
  • Hospitals

Depending on these expenses, it may or may not make sense to itemize. Your CPA will help guide you on whether or not taking the standard deduction or itemizing is in your best interest.

Health insurance form 1095A will be generated and sent to you as proof that you have insurance. 

Additionally, HSA contributions will generate a 5498, which your CPA will need to receive credit for these contributions.

State and Local Taxes

Any time you pay state and local taxes, be sure to keep records of these payments. These taxes include:

  • Property tax
  • State income tax

Your CPA can use these taxes to try and save you money on your taxes.

Contributions to your traditional IRA can also be deducted from your taxes.

There’s a lot to go through here, but we recommend starting early and keeping track of these documents to make taxes less stressful. If you prepare for your taxes throughout the year, it will make tax season a lot less chaotic for you.

Click here if you would like to speak to us about donor-advised funds.

January 9, 2023 Weekly Update

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We do love it when someone refers a family member or friend to us.  Sometimes the question is, “How can we introduce them to you?”   Well, there are multiple ways but a very easy way is to simply forward them a link to this webpage.

Here are this week’s items:

Portfolio Update:  Murs and I have recorded our portfolio update for January 9, 2023 

CLICK HERE TO WATCH THE UPDATE

This Weeks Podcast – 10 Tax Tips For The Beginning 2023

Do you want to keep your tax planning smooth as you set goals for this year? As you think about getting ready for the tax season and setting goals for 2023, we know you want to make your life a bit simpler.

We discuss things like tax-free sources of income, Roth conversions, tax withholding, Required Minimum Distributions, and much more.

CLICK HERE TO LISTEN TO THE PODCAST

 

CLICK HERE TO WATCH ON YOUTUBE

This Weeks Blog – 10 Tax Tips For The Beginning 2023

With 2023 here, one thing that you want to consider when retirement planning is taxes. You never want to spend more money on taxes than necessary, and that’s why we’re starting this year off by walking you through tax tips.

CLICK HERE TO READ THE BLOG

10 Tax Tips for The Beginning of 2023

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With 2023 here, one thing that you want to consider when retirement planning is taxes. You never want to spend more money on taxes than necessary, and that’s why we’re starting this year off by walking you through tax tips. 

10 Tax Tips to Start 2023 Off Great

1. Take Advantage of Tax-free Income

Tax-free income is ideal, and you likely have:

You may have to pay taxes on all of these sources of income. However, you may have tax-free income that you can begin to take:

  • Roth IRA distribution (not the ideal source of income to start off retirement)
  • Savings 

Using savings for your source of income this year can help you with Roth conversions, avoiding capital gains or Social Security payments, too.

If you consider where your income is coming from, it will allow you to at least leverage tax-free income to your advantage this coming year.

2. Consider Traditional to Roth IRA Conversions

Converting a traditional IRA account to a Roth account may be in your best interest. First, you can allow your money to grow tax-free. Second, if someone inherits these accounts, they benefit from the tax-free account, too.

You will need to pay taxes during the conversion, and this hits on point 1, too.

If you can use tax-free income during the year of your conversion, you may be able to stay in a lower tax bracket and save money on taxes.

3. Review Your Tax Withholding

If you’re early in retirement, you might find yourself:

  • Under-withheld
  • Overpaid 

In both cases, it’s better to be right on the mark with your taxes. If you overpay, there’s no penalty, but you also can’t grow this money if it’s in the government’s hands. We can review these withholdings with you to ensure that you’re not paying too much or too little to the government.

4. Track Medical Expense Deductions

Medical expenses may or may not be deductible, but you need to have these expenses outlined in either case. You can deduct some of these expenses, and your accountant will need this information to know if itemizing and medical expenses can reduce your tax burden.

5. Take Advantage of Charitable Contribution Deductions

If you don’t itemize your taxes, you may still be able to leverage charitable contributions. You may be able to use:

  • Qualified charitable distributions, which will take money from your IRA directly and gives it to charity without the money ever hitting your bank account.
  • Donor-advised funds. You can stack your contributions over a multi-year period into a single year to reduce your taxes if you use one of these funds.

Anyone who is charity inclined can take advantage of their charitable contributions to reduce their taxes.

6. Don’t Forget About Quarterly Payments

Quarterly payments are foreign to a lot of people who are just transitioning to retirement. You may have gains throughout the year that are realized, and the government can assess a penalty because they expect to be paid on this gain as it happens.

For example, if you sell a stock or a house, you may need to make a quarterly payment.

Sitting down with your accountant or tax advisor can help you better understand if you need to make quarterly payments or not.

7. Don’t Forget About State Taxes

State taxes must be considered, too. It’s easy to focus on your federal taxes and forget that the state wants their money, too. If you do live in a state that collects income tax, keep this in the back of your mind throughout the year.

8. Consider Part-time Work

When you’re planning for retirement, you may or may not consider part-time work. A lot of our clients become consultants and others will take on a part-time job to stay busy, cover medical insurance or just generate some additional income.

Working part-time may also open the doors for other things, such as:

  • Eligibility to contribute to retirement plans
  • Taking advantage of benefits
  • Traveling more during retirement

9. Don’t Forget About Required Minimum Distributions

Folks who are 72 or older will need to take their required minimum distributions (RMDs). You can take a monthly payment or a full payment upfront, too. In all cases, you need to make sure that you’re meeting the RMD thresholds every year.

If you’re just turning 72, we highly recommend giving us a call at (919) 787-8866 to discuss RMDs and to better understand how much you need to take out of these accounts each year.

10. Keep Track of Your Tax Documents

You’ll begin receiving mail in February that you need to compile together and give to your accountant. If you don’t keep track of these documents, you’ll need to scour for them rapidly, which is never fun.

A few of the documents that you’ll receive include:

  • 1099s from investment accounts
  • 1099s from Social Security
  • W-2s

Organizing all of these documents is a great way to start the year, whether you’re working with a CPA or doing taxes yourself. It’s good practice to have a system in place to manage all of your taxes, receipts and similar documents throughout the year.

Being fully prepared when going to your CPA will make taxes a lot less stressful in 2023.

We hope that these tax tips will help you go into the year with confidence, knowing that you have everything in order to meet your tax obligations but never pay more than necessary.

If you have any questions, please feel free to schedule a call with us today.

Looking Back – Taxes – Retirement Planning – Annuities

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In our last podcast of 2022, we wanted to look back at the past year and help you find some of the great resources that we provided. We’re going to use this post to wrap up the year and help recap all the great topics that we’ve covered and what you need to know going into 2023.

What are the Best Resources for Taxes?

We’ve done a lot of podcasts and we have a full list of them here for you. However, a few of the podcasts that we would like to direct your attention to are:

  • Episode 185 – An interview with Steven Jarvis, CPA about the end-of-year tax strategies for 2022. Steven’s concepts are all about all-year tax planning, what to plan for the end of the year, RMDs, Roth conversions, QCDs and so much more. These strategies apply year-to-year with just a few number changes,
  • Episode 163 – Another one with Steven Jarvis about mid-year tax strategies that you can deploy. The concepts are very similar to episode 185, but one thing we do cover in greater detail is Roth conversions.
  • Episode 184 – Tax planning should be a part of your retirement plan. In this episode, we tie together retirement and tax planning. We discuss Social Security, taxes, retirement accounts and the benefit of Roth conversions.
  • Episode 158 – In this episode, we discuss tax planning versus tax preparation. We use this episode to discuss the key differences between planning and preparation, reducing taxes on social security and more.
  • Episode 161 – An episode that revolves around RMDs and QCDs. This is an episode that we recommend anyone 70 ½ or 72 really take a look at. You need to understand the requirements and rules of RMDs and QCDs to avoid potential penalties. 

For taxes, these are the episodes that we recommend that you listen to for a better understanding of taxation, requirements and maybe even ways that you can save money in 2023.

However, we also talked a lot about retirement planning this year, and it’s something that we also wanted to provide a guide on finding for you.

What are the Best Resources for Retirement Planning?

Planning for retirement is something people need to begin doing much earlier than they realize. However, the following episodes are ones that we believe are powerful and filled with a lot of great information:

  • Episode 182 – An episode titled “3 Questions to Ask Yourself About Retirement.” In this episode, we cover “what do we want to do in retirement?”, “do you need professional help with retirement?” and much more.
  • Episode 180 – Inflation and the federal reserve are two things that are nearly impossible to avoid in the news, online and at the store. In this episode, we answer questions about inflation, what the federal reserve is doing and how to navigate inflation. We talk about active management and how to navigate these situations before and during retirement.
  • Episode 177 – A major topic of discussion that is growing is the topic of IRMAA surcharges and how they impact your Medicare premiums. We explain how IRMAA works, the different tiers to be concerned about and more about these surcharges. We will be updating this in 2023 and will have a great insert for anyone who wants one (just call us for more information).
  • Episode 157 – Retirement bucket strategies are something of major importance to us because they help protect your retirement from massive fluctuations.  We discuss multiple buckets that make investing simple and include your cash bucket, income and safety bucket and growth bucket. Using these buckets, it’s possible to secure your retirement with less risk.
  • Episode 146 – An episode that talks about a risk-adjusted portfolio. We discussed your view of how much money you need to lose to lose sleep. We go through asset allocation, individual risk adjustment, safe growth and more in this episode.

When it comes to retirement planning, we truly believe that these are the best podcasts that we’ve had in 2022. However, we do have one more section of resources that we would like to cover:

Annuity Resources

Annuities are something that we talked a lot about this year, and we want to point you to some of our best episodes on this topic:

  • Episode 153 – Bonds and bond alternatives are something that we’ve seen change a lot in recent years. The old 60% equity and 40% bonds portfolio worked for decades. However, bonds have changed in recent years thanks to inflation and rising interest rates. Bonds have not allowed us to protect portfolios in 2022, so this episode dives into many bond alternatives that work well to offset the risk of the equity market.
  • Episode 187 – An episode where we discuss fixed annuities and why they’re at their best rate in 15+ years. We discuss why inflation works to boost fixed annuities and how the right annuity can provide a lifetime of income to you that is very similar to a pension.

We’re excited for you to review these resources and feel confident about your retirement going into 2023. Of course, we have a lot of great episodes planned for this coming year that we know you’ll absolutely love.

If you do have any questions about retirement planning or any of the topics above, we would be more than happy to talk to you about them.Click here to schedule a call with us.

2022 End of Year Tax Strategies

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Taxes should be on everyone’s mind at this point in the year. Retirement planning and end-of-year tax strategies should be interlinked to help you secure your retirement and pay as little as possible in the process.

We’re happy to have CPA Steven Jarvis of Retirement Tax Services (RTS) to explain to us that with one month left in 2022, there are a lot of tax strategies we can put in place that can make a big difference this coming year. In fact, he recommends that we think about tax planning every month of the year.

However, there’s a lot to do before the calendar year flips over.

What to Ensure Gets Done Before the End of 2022

A few things that Steven explains that we need to think about, and they may not apply to everyone, include:

  • Required minimum distributions (RMDs): You need to begin taking care of your RMDs. RMDs are required when you hit 72, and if you don’t take them, you will face a major penalty from the IRS. The penalty is up to 50%.
  • Qualified charitable distributions (QCDs): At 70-½, you can begin using QCDs if you’re charitably inclined. You can use QCDs during the filing year and it allows you to give to charity with some tax benefits attached.
  • Retirees still working: Some retirees are still working and accumulating income, and they should check in with their CPAs to ensure that their taxes are in order. The filing deadline may be in April, but the IRS is anxious to get your money and will apply interest if the money isn’t received in January. You also go into 2023 knowing if you need to set up your tax withholdings.

There’s a lot to consider, and an accountant can help you navigate these complex tax considerations.

For example, let’s assume that someone at age 72 has an RMD of $30,000 and doesn’t need the money. In this case, you may want to consider a QCD if you’re charitably inclined. If you’re not charitably inclined, you’re better off just paying the taxes on the money and keeping it.

However, if being charitable is important to you, a QCD fits into your tax planning perfectly. The logistics here are very important:

  • Don’t take the RMD. Put it into your bank account and then transfer it to the charity of your choosing.
  • Do use a QCD, which allows a direct contribution to the charity without the money ever entering your possession and having to pay taxes on it.

Your IRA will allow you to write a check to the charity of your choosing. You can take the QCD and benefit from the tax deduction without needing to add it as a line item. Since most people take the standard deduction (more on that soon), this is a tax strategy that is perfect for you.

QCDs are very important tools that you can use before the end of the year to help reduce your tax burden while maximizing the amount of money the charity receives.

Standard Deductions

A standard deduction is available for:

  • Married and filing jointly: $25,900
  • Heads of household: $19,400
  • Single filers: $12,950

The standard deduction allows you to remove the amounts above from your income. So, in this case, the $25,900 is not taxable for someone filing jointly.

For many people, a standard deduction is a win because it allows you to reduce taxable income drastically.

However, it doesn’t make sense for some people to use a standard deduction. If you do not have deductions that surpass the figures above, it’s better to use a standard deduction. Otherwise, you can reduce taxes more by using line items and taking these additional deductions.

Example of Not Taking a Standard Deduction

Let’s assume that for the next three years, you plan on giving a charity $15,000 annually for a total of $45,000. Donor-advised funds (DAF) will be used in this case, allowing you to put $45,000 in the fund now and take a deduction this year.

A DAF allows you full control of when and how the funds are distributed.

The $45,000 is above the standard deduction, so you can itemize your taxes this year and reduce taxes by $45,000. In net savings, you’ll save $4,000 – $5,000 by itemizing deductions. And next year, when you don’t have a DAF deduction, you can go right back to taking the standard deduction.

Why is this important?

You can save money while giving more money to the charities that you care about.

Deadlines for End of Year Tax Strategies 

Roth conversions and contributions are going to be very important. The IRS doesn’t do us favors with their deadlines. You can carefully put money into an IRA for the previous year up until the tax deadline, but this must be done with precision.

If you have a traditional IRA, you must convert to a Roth IRA before the end of the calendar year.

There are two main things to consider if you’re unsure whether a Roth conversion is good for you:

  1. Bob and Sue will need a lot of money one day, maybe for an RV or roof repair. The IRS will take part of the money you take out for taxes, depending on the income buckets you have in place. A Roth account allows you to pay taxes now and not be concerned about paying taxes on the money in the future.
  2. You think tax rates may go up in the future. Roth buckets require you to pay taxes now and at today’s tax rates. The money that builds in the account is 100% tax-free.

You should proactively decide when you want to pay taxes using the information above.

In our business, a lot of clients ask if there’s a rate of tax on their Roth conversion. Understanding how the Roth conversion is taxed is important and is based on your marginal tax rate.

Roth conversions increase your taxable income, depending on your other income sources. You may have a 0% conversion or one that is 22% or higher. An accountant will need to look through your finances to really shed light on your situation and the taxes you’ll owe.

However, below is a good example to review.

Example of Roth Conversion Strategies

We have an individual who is under 72, so they do not have to take their RMDS. Additionally, this individual also has money in the bank that has already been taxed. When this person retires, they’ve set themselves up to have zero taxable income the first year in retirement because they’ll live on their cash.

The person has 0 income and still has a standard deduction of $25,900 they can take.

In this case, you can convert $25,900 and pay $0 in taxes on it because of the standard deduction that you have. You can also choose to convert $40,000, and in this case, the person would pay 10% in taxes on the $14,100 left.

You can also consider leveraging long-term capital gains to pay as little taxes as possible.

Everyone reading this will want to sit down with an advisor or CPA to find things that you can do to benefit your retirement.

Bonus: Inflation Reduction Act

While talking to Steven, we asked him about the Inflation Reduction Act and what it would mean for our average listeners. The media has made this Act seem very impactful, but Steven explains that the average person will not experience a direct impact.

Yes, 87,000 IRS agents were hired, but the agency has been grossly understaffed and has funding to improve customer service and other aspects of the IRS. The chances of being audited still remain low. Steven states that nothing will change for his clients: he’ll pay every dime in taxes that you owe, but never leave a tip.

Steven provided a lot of great information and ideas on what anyone heading into retirement should be doing before 2023 to help their tax situation.

Please subscribe to our podcast for other, great informative podcasts if you haven’t done so already.

November 14, 2022 Weekly Update

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We do love it when someone refers a family member or friend to us.  Sometimes the question is, “How can we introduce them to you?”   Well, there are multiple ways but a very easy way is to simply forward them a link to this webpage.

Here are this week’s items:

Portfolio Update:  Murs and I have recorded our portfolio update for November 14, 2022 

CLICK HERE TO WATCH THE UPDATE

This Weeks Podcast – Tax Planning Should Be a Part of Your Retirement Plan

Who wants to pay taxes? It’s impossible to avoid paying taxes altogether; what we can do is be more efficient with them.

Tax planning is an essential part of your retirement plan. To plan tax efficiently in your retirement, you have to understand all the different investments you’ve accumulated and the different types of tax structures to them.

CLICK HERE TO LISTEN TO THE PODCAST

 

CLICK HERE TO WATCH ON YOUTUBE

This Weeks Blog -Tax Planning Should Be a Part of Your Retirement Plan

Retirement planning is on every worker’s mind, but there’s one area that people often overlook: tax planning for retirement. You work hard for your money, and if you take the time to plan out your taxes before retirement, it can keep more money in your pocket.

So, Why Should Tax Planning Be a Part of Your Retirement Planning?….
CLICK HERE TO READ THE BLOG

Tax Planning Should Be a Part of Your Retirement Plan

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Retirement planning is on every worker’s mind, but there’s one area that people often overlook: tax planning for retirement. You work hard for your money, and if you take the time to plan out your taxes before retirement, it can keep more money in your pocket.

Why Should Tax Planning Be a Part of Your Retirement Planning?

Tax planning in retirement has become such a major importance that it’s something we’ve incorporated into our service. We bundle a lot of things into the cost, such as:

  • Estate planning
  • Tax planning
  • Retirement planning

We believe taxes are so important that we’ve partnered with CPAs to better help our clients. However, if you’re not a client of ours and are wondering why taxes are something to consider when you’re trying to secure your retirement, we’re going to clear that up for you.

Note: This is a high-level aspect of tax planning and is not exhaustive.

Linking Taxes and Retirement

When you enter retirement, you may have an IRA, Social Security and other income sources, all of which have their own tax requirements attached to them. Reviewing these income sources allows us to find ways to minimize your tax burdens.

Understanding the accounts that you have is the first step in the process.

Many of us have saved into pre-tax accounts, such as:

  • 401(k)
  • Traditional IRA

However, Roth accounts are handled differently, too. 

If you receive Social Security, it can also be taxed in many cases. So, there’s a lot to consider when entering retirement with all of these income sources. Let’s start with the one that most people don’t know about.

Social Security and Taxes

We’re concerned about Social Security because there’s been a lot of talk about changing it. Many of these changes may also lead to higher taxes on this income, but in the current space, you can still have benefits taxed.

Based on income, 85% of your Social Security can be taxed.

  • Individuals with an income of $25,000+ will have up to 85% of Social Security converted into taxable income.
  • Joint taxes filed with income of $32,000+ will have up to 85% of Social Security converted into taxable income.

Through tax planning and retirement planning, we may make sure there’s no other income coming in aside from Social Security to try and help save you money. Cash may be available for you to take to meet this obligation, and it may only be possible for a year or two.

If we begin in advance, we can find ways not to take money out and use cash to pay bills to reduce the risk of your benefits being taxed.

However, you need to begin as early as possible to reduce taxes. Waiting until late in the year can make it difficult to find viable ways to reduce your tax burden.

Taxes on Roth IRA and Traditional IRA 

Many people contribute to their 401(K) or IRA, and these are traditional accounts. When we say “traditional” accounts, we mean that these accounts have never had taxes paid on them. For example, if you have $1 million in a traditional IRA, you will need to pay taxes on these accounts when you take a withdrawal.

You take a tax break for your contributions, but all of your withdrawals add to your income and can be taxed.

Adversely, a Roth IRA or 401(K) is a beautiful tool that you can use for retirement. These accounts offer:

  • Tax upfront
  • Tax-free growth
  • No future taxes

You’ll pay taxes on your Roth account today, but it’s allowed to grow tax-free. For some of our clients, they’ll take some of their money from a traditional and Roth account to keep them in a lower tax bracket.

Roth accounts don’t provide an immediate tax break, but the money grows tax-free.

One method that is very popular in retirement planning is a Roth conversion.

Understanding the Benefit of a Roth Conversion

Roth conversions are a way to turn money from a traditional IRA over to a Roth. You will have to pay taxes immediately for the conversion, but when in the Roth account, it will grow for free.

Let’s look at an example of someone who has $300,000 in a traditional IRA and wants to convert $50,000 into a Roth IRA. In this case:

  • $50,000 goes into the Roth
  • $50,000 is claimed on tax returns

If you already made $75,000 and $50,000 was converted into a Roth account, it will lead to paying taxes on $125,000.

We use complex software on our end to identify your tax burden and any issues that may come up with a conversion that we overlook.

However, let’s assume the following:

  • You’re retiring in 2022
  • You’re not 72, so you don’t need to take out income from a traditional IRA
  • In 2023, you won’t have earned income
  • You have cash you can use for spending money

If you’re in the position above, you can convert some of your traditional IRA at 0% taxes. The government offers a standard deduction that you don’t benefit from unless you earn income. In this case, you can convert the amount of the standard deduction for free.

You can then consider whether you want to convert more money because you’re still in the lowest tax bracket at the moment.

Obviously, if you have a lot of income coming in, it may not be possible to pay such little taxes on your Roth conversion. We recommend that you tie tax and retirement plans into one because they work very well together.

Cash in the Bank and Taxes

If you have cash in the bank, there are no taxes attached to it. However, if you receive interest on these dollars, the taxes are typically low and negligible. You’ve already paid taxes on this money.

Brokerage Accounts and Taxes

Brokerage accounts are a bit more complex because some of the money may be taxed and the other money may not be taxed. There are also investments that have dividends that can cause you to pay taxes.

If you hold a short-term investment, you’ll need to pay taxes at your current tax rate if sold within a year.

Long-term capital gains are lower, so this can be used as an advantage. You can also leverage tax loss harvesting on these accounts to save money.

Tax planning can have such an impact on your retirement that it’s something you really need to consider. Taxes can also impact your IRMAA, or how much you need to pay for your health benefits in retirement.

Working with a CPA and financial advisor who are connected can help you save a lot of money in retirement.

Click here to schedule a call with us to discuss taxes and your retirement.

June 20, 2022 Weekly Update

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We do love it when someone refers a family member or friend to us.  Sometimes the question is, “How can we introduce them to you?”   Well, there are multiple ways but a very easy way is to simply forward them a link to this webpage.

Here are this week’s items:

Portfolio Update:  Murs and I have recorded our portfolio update for June 20, 2022 

CLICK HERE TO WATCH THE UPDATE

This Weeks Podcast -Steven Jarvis – Mid-Year Tax Strategies–

Are you committed to having a tax-planning conversation outside the tax season? The only way to win in the tax game is to have a proactive approach when it comes to tax planning.

It’s important to be committed to having some kind of tax-planning conversation on any topic, especially…

CLICK HERE TO LISTEN TO THE PODCAST

 

CLICK HERE TO WATCH ON YOUTUBE

This Weeks Blog –Tax Planning For Retirement–

CLICK HERE TO READ THE BLOG

Mid-Year Tax Strategies You Should Consider

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We recently sat down with one of our good friends Steven Jarvis CPA to discuss tax strategies everyone should be considering whether they’re currently in the middle of retirement planning or trying to secure their retirement.

In one of our previous podcasts, we also sat down with Steven to discuss taxes.

In fact, many of our clients also started working with Steven, and one thing that we continue hearing is that he helps eliminate the stress of taxes. According to him, the stress comes from stressing about doing taxes in April rather than engaging in tax planning throughout the year.

Steven and his team work intensely after-tax season to ensure that their clients follow the recommended tax strategies. So, we’re going to pick Steven’s brain to see what he recommends for your mid-year tax strategies.

First, Don’t Be Under the Impression That There’s Nothing You Can Do About Your Taxes

Before going any further, how did you feel about your taxes this year? Did you feel like you did your duty, paid your taxes and there was nothing else that you could do? If so, you’re like a lot of people that accept taxes as being a part of life.

And they are.

But you shouldn’t leave the IRS a tip because you’re not leveraging tax strategies. Taking a proactive approach to your taxes means that you’ll minimize your tax burden as much as legally possible.

Since it’s the middle of the year, it’s time to start thinking about them to lower your coming tax burden.

A few options available are:

Qualified Charitable Distributions (QCDs)

QCDs are one of the tax strategies that we often see with our clients. Steven explains that a QCD works by:

  • Taking money directly from your IRA
  • Sending the money straight to the charity
  • Meeting the QCD requirement of 70 1/2

The money cannot be made out to you or hit your bank account to benefit from a QCD. Instead, this is a process we look at in conjunction with handling your required minimum distributions (RMDs).

QCDs are powerful because when you take money from your bank account and donate it to a charity, there’s a 90% chance you’re not benefitting from it come tax season. 

Why?

Ninety percent of people do not itemize their tax returns, so they’re unable to deduct their donations.

QCDs allow you to:

  • Gift directly to charity
  • Benefit from lower income and tax rates

Another advantage of a QCD is that it lowers your adjusted gross income, too. Why is having a lower adjusted gross income important? Your Medicare benefit costs will be lower if your AGI is lower.

So, you’re:

  • Paying less in healthcare costs
  • Lowering your taxes
  • Donating to a cause you care about

QCDs are a great way to give back and receive a benefit from it, too. However, if you’re not 70-1/2 or the standard deduction is more beneficial than itemizing your taxes, what can you do?

Use a donor advised fund.

Donor Advised Funds and How They Work

A donor advised fund (DAF) is something to consider when you can’t use QCDs. DAFs allow you not to tip the IRS and still take a standard deduction. These funds will enable you to:

  • Lump multiple years of donations into a fund
  • Taxpayers still control the funds
  • Eventually use the funds for charitable purposes
  • Get your donations above the standard deduction to itemize

For example, if you donate $10,000 a year, you may not have enough to itemize and take the deduction. Instead, you may decide to put $30,000 into a DAF and immediately benefit by being able to itemize your taxes.

You don’t even need to distribute all the funds to a charity today and can simply opt to give every year to a charity of your choice. The key is to send these funds to a charity at some point.

So, this year, you put $30,000 into a DAF, itemize your taxes, and lower your tax burden.

Next year, you’ll likely go back to the standard deduction, so you’re paying less taxes this year and not paying any additional taxes for years you don’t contribute to a DAF.

However, there are also Roth conversions, which may help you with your tax strategies, too.

Roth Conversions to Lower Your Tax Burden

A Roth conversion converts a non-Roth account into a Roth. You take money out and pay taxes on it now, and let it grow tax-free in the future. You’ll pay more taxes this year, but your money grows tax-free afterward, which is great as your retirement accounts gain interest over the years.

Should you do a Roth conversion? 

We believe everyone should consider a Roth conversion, but what does Steven think? We asked him.

  • Everyone should consider a Roth conversion if they have IRA dollars.
  • Conversions aren’t the right option for everyone.
  • Roth conversions this year happen at a discount because of the markets.

In 2026, taxes are set to go up if nothing else changes, so putting money into a Roth account protects you from higher tax burdens.

If you’re in your peak earning years, it may not be in your best interest to go into a Roth conversion.

Steven states that the only way you’re worse off is if taxes go down. But are you really convinced that taxes will go down in the near future? Most people respond with no.

In this case, a Roth conversion is beneficial.

You’ll need to make your Roth conversion by 12/31 of the year.

Finally, Steven recommends having tax conversations outside of the tax season. You need to take a proactive approach to your taxes, work with a CPA and develop tax strategies to save money on your upcoming taxes.

If you wait until March or April to think about your taxes, it’s too late.

Sit down with a professional, discuss your options and determine what tax strategies you can use this year to lower your taxes – or not leave the IRS a tip.

Click here to learn more about our book: Secure Your Retirement: Achieving Peace of Mind for Your Financial Future.

2021 Tax Deductions and Tips

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Tax professionals offer the best option for learning about 2021 tax updates. A good CPA can provide you with updates that can affect you when filing your taxes and can hopefully reduce the taxes you owe or increase the refund you’re owed.  Here are some suggestions from a CPA that we know and trust.

2021 Tax Updates You May Have Overlooked

Charitable Tax Deductions

Charity tax deductions are still available, allowing you to take advantage of giving away some of your money. One of the main differences this year is that you’ll need to itemize your charitable tax deduction, which is an unexpected change for a lot of people.

You can deduct at least $300 for an individual or $600 for a couple.

Itemizing your deductions only makes sense when you have more than the standard deduction of $12,500 or $25,000 for couples. For example, it makes more sense not to itemize your deductions when the itemized deduction comes out to less than the standard deduction.

Straight donations are mostly the same, so it’s important to get a receipt. You should be itemizing deductions to really leverage straight deductions which may include:

  • Cleaning out your attic
  • Donating items to Goodwill or another charity

When you’re donating to charity, you can donate up to 60% of your adjusted gross income for tax purposes. Most individuals will not hit this threshold because it’s high, but it is something high net worth individuals may want to think about.

Bonus: Qualified Charitable Distributions (QCDs) are for people older than 70.5, and it allows you to take money out of your IRA and donate directly to charity. This can be done on top of your standard deduction and must be made out directly to the charity. When you do this, you’re not taxed on the withdrawal and you can deduct the donation on your taxes to offer a double benefit to you.

Medical Deductions

When you’re older, closer to retirement or have had to pay for medical procedures in the past year, medical deductions are something that you should be considering. A lot of medical deductions can be made:

  • Insurance
  • Prescriptions
  • Direct doctor costs

If you have a major deduction, you may want to itemize to leverage these deductions. The $12,500 or $25,000 deduction will need to be considered because there’s really no reason to itemize if you’re not trying to deduct higher than this amount.

Reaching a high enough threshold to itemize your medical deductions is often only possible when you’ve had major medical procedures performed. A few of the procedures that may be included are:

  • Dental implants
  • Nursing care
  • Other major issues

Earned Income Tax Credit

The earned income tax credit is based on how much you earn and how many qualifying children that you have. You need to be between 25 and 65 years old and have qualified earned income. A person must earn $16,000 as a single person or $22,000 as a couple to maximize this credit.

When you hit $51,500 as a single person and $57,500 as a couple, this is when the earned income tax credit starts to really phase out for you.

If you have no children, you can expect up to $543, and with three children, $6,700.

Child Tax Credit

A $2,000 tax credit is given to a qualified child between the age of 0 and 16. Once they hit 17 and older, this credit drops to $500, which is quite a jump. The year that the child turns 17, the credit is lowered.

There is also an income threshold for this credit:

  • $200,000 for a single person
  • $400,000 for a couple

Home Office Deductions

A lot of people are working from home this year. COVID has changed a lot of people’s working situations, and there are a lot of questions surrounding home office deductions. Employees that receive a W2 are no longer able to deduct their home offices.

Business owners can write off their home office if it remains their primary place of business.

You can deduct $5 per square foot, or you can itemize your deductions. The itemization is only beneficial if you can deduct more than the square foot value of your office. Remember to keep receipts on all of your expenses from your home office to ensure that you can maximize your deductions and have proof of your expenditures.

If you only work from your home office once or twice a week, you won’t be able to claim this deduction because it’s not your principal place of business if you’re working more days per week outside of your home.

Unemployment Benefits and Your Taxes

All of your unemployment income is viewed as wages. The income is reported on a 1099G, which you will use to claim all of these benefits on your taxes.

Bonus: Stimulus Check and Claiming It as Income

You do not need to claim your stimulus check on your tax return.

Tips When Thinking About Your 2021 Taxes

A few of the tips that we want you to know about when thinking about your taxes in 2021 are:

  • Financial management to manage your portfolio can help you leverage capital gains rates at the current rate.
  • Employee benefits should be managed, such as HSA, 401(k) and other options. Maximize your 401(k) and consider an HSA to use for your health expenses. The HSA can be funded and grow, and by the age of 65, you can take out the money while enjoying tax benefits. Otherwise, the HSA withdrawals all need to be medical related.
  • Review federal withholdings early in the year to ensure that your withholdings are proper. Recent changes to the withholding rate have left many people paying more at the end of the year than they expected. Use the IRS.gov Tax Withholding Estimator to properly adjust your rates at the beginning of the year so that you have fewer surprises at tax season.
  • Try and donate $300 to $600 to a charity this year for additional savings.
  • If you’re going to itemize, consider giving more to charity if you can. Double up on donations to maximize your deductions.
  • Mortgage interest rates can also be deducted on the itemized deductions.

On a final note, be sure to be compliant and file your taxes on time or get an extension. Also, make all of your estimated payments and pay what you think you’ll owe on April 15 because you’ll be penalized otherwise even if filing an extension.

 If you want more information about preparing your finances for the future or retirement, check out our complimentary Master Class, ‘3 Steps to Secure Your Retirement’. 

 In this class, we teach you the steps you need to take to secure your dream retirement. Get the complimentary Master Class here.

5 Things You Should Do 5 Years Before Retirement

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Retirement planning is more than just putting money into an investment account and hoping you have enough money to retire. You need to plan your retirement, and you need to keep revisiting this plan throughout your lifetime.

If you’re getting closer to retirement, there are five main things that you can do five years before retirement to ensure you’re able to reach your retirement goals.

1. Gather Your Important Documents

You should start gathering all of your important documents to have them ready to overview before retirement. We’re talking about documents relating to:

  • 401(k) plans
  • 403(b)
  • Annuity paperwork
  • Brokerage accounts
  • Estate planning documents
  • IRAs
  • Pension
  • Savings
  • Social Security

If you’re going to have a pension, call your company and ask them about the pension plan and what you can expect to be paid at certain ages. You might be able to take a lump sum.

You’re going to need all of these documents before retirement, so gathering them early on allows you to see where your retirement stands five years out from your actual retirement.

Note: Social Security pays out different amounts depending on your age. You can check this information on SSA.gov, but generally, you can retire at 62, full retirement age and 70. Early retirement, or age 62, will result in a 75% reduction in your benefit amounts.

2. Get Real About Your Spending

There needs to be a link between how much you save for retirement and how much you plan to spend when retiring. Retirement planning should never be left to chance by simply choosing a random monetary goal that you would like to achieve.

You might be fine living off of $2,000 a month during retirement, while others easily spend $10,000 a month when they retire.

We recommend breaking your down spending into three categories so that you really know what your spending will look like in retirement:

  • Essential income. Mortgages, food, bills, subscription services, gym memberships, etc.
  • Wants. Travel, spending time with grandkids or family members, golf club or other subscriptions. This category is really what you envision for your retirement.
  • Legacy/Giveaway. Charities, money left to family members, etc.

Try and factor in everything a good retirement means for you. You might need to cut back on some of your plans to reach your goals, but this is okay.

3. Write Down Your Goals

You know what your spending habits may look like, so now it’s time to really have some goals in place. The first year is fairly easy because you’re transitioning to a life without a 9-to-5 schedule. You’re free to do what you want, and this is an awakening feeling.

But the next few years are really where your retirement planning will be a success or failure.

Sit down today and write down:

  • Where you want to live
  • Where you want to travel
  • Goals of things you want to do in retirement

Be as specific as you can when writing down your goals. You may want to spend time with grandkids or go to Italy for a year. Whatever your goals are, write them down.

4. Learn About Investment Strategies and Risk Tolerance

You’re five years out from retirement, and you’ll need to be very cautious about your risk tolerance. Now is not the time to invest in high-risk investments because you don’t have the luxury of being in your 20s and taking these risks.

Investing has two main categories:

Passive Management

A passive investor puts their money into a stock and holds it over the long-term, or the person can be investing through other investment vehicles where no active management occurs. In all cases, even if the portfolio is diversified, there is a level of risk.

Google may be going strong today, but it could be the JC Penny of tomorrow where stock prices in 2011 were $35 to $40 a share and are $0.11 a share today.

Active Management

A strategy that shifts with the current markets. If the stocks are slumping, more precious metals may be purchased or stocks to hold your retirement fund’s money steadier, even if the possibility of returns may be lower. Managers will be working to mitigate potential losses and will be actively monitoring investments.

Risk tolerance changes, and you may not be able to afford risking 40% of your retirement before retirement begins. Educate yourself on your risks and the strategies you can take to lower them.

5. Come Up with an Income Plan

Retirement planning needs to be put down on paper. You need to think about:

  • Inflation
  • Long-term care
  • Healthcare
  • Remodeling
  • Home repairs
  • New car purchases

When your plan is well-developed, you’ll have “what if” scenarios in place that you can follow during retirement. It seems like a lot of work, but an income plan can give you peace of mind in knowing that you can confidently leave the workforce and finally retire.

Whether you plan to retire five years from now or 20, you don’t have to go at it alone.

Click here to follow our 4 Steps to Secure Your Retirement course.

Roth Conversion – When and How to Plan

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If you have a traditional IRA, you may be considering a Roth conversion. There are many reasons why a Roth might suit your money better than a traditional IRA, however, knowing the differences between the two and the long-term results of moving your money can help you decide which IRA to choose.

Roth IRAs and conversions are a popular topic for those approaching retirement, so in this post, we explain why a Roth IRA might be beneficial to you, when to do a Roth conversion, and what’s involved in the process. 

The differences between a Roth IRA and a traditional IRA

An IRA, or Individual Retirement Account, allows you to save for your retirement through tax-free growth or on a tax-deferred basis. There are several different types of IRA, but the two most common we see compared are Roth and traditional accounts.

If you have a traditional IRA, you typically receive an immediate tax benefit after you’ve contributed. You put your money in pre-tax, and it will grow tax-deferred. This means that when you begin withdrawing money from the IRA, it’s treated as income and is taxable.

If you have a Roth IRA, you don’t get any immediate tax benefits after contributing. You put your money in after-tax, however, it grows tax-free within the Roth account and remains tax-free after you withdraw it.

So, if you’re looking at making substantial or long-term contributions to an IRA, a Roth account could be a better option for you. This way, you’ll pay less tax in the long run, as you won’t have to pay any tax on your savings growth.

But if you’d prefer immediate tax benefits, then a traditional IRA could be the better choice. So which IRA is best for you depends on whether you’d like your tax benefits now or in the future.

How RMDs affect traditional IRAs 

One thing to bear in mind with traditional IRAs is that you have to take an RMD (required minimum distribution) from the age of 72 and every year after.

This is the deal you make with traditional IRAs. While you receive immediate tax benefits when you make contributions, RMDs are the government’s way of ensuring that they still receive tax revenue. RMDs are not optional, and you have to take them every year even if you don’t need the money.

RMDs are also taxed at future tax rates. If you believe that tax rates will be lower in the future, then a traditional IRA may make more sense for you. However, if you think that they will be higher, you might want to consider a Roth IRA.

A Roth IRA has no RMDs. You can withdraw as much or as little as you like, and you won’t be taxed on any withdrawals. 

Why contribution limitations can lead to conversions

There are contribution limits to both Roth and traditional IRAs, but for Roth IRAs there are also income limitations. If you earn too much, then you cannot make a direct contribution to your Roth IRA.

This is where a Roth conversion can help.

A Roth conversion is where you transfer money from your traditional IRA into your Roth IRA. One important thing to remember when you do this is that you have to pay tax on that asset. As the money will have gone into your traditional IRA pre-tax, you must pay tax on it before you can put it into your Roth IRA.

Once your money is in the Roth account, it can continue to grow tax-free for however long it’s in there. There are no requirements for when you should start taking money out or how much you should take out annually.

If you are taking RMDs from your traditional IRA, it’s important to know that you cannot convert them into a Roth account. The only way to move your RMDs into a Roth account is to combine it with an additional amount first. For example, if your RMD is $15,000 and you want to move this into your Roth account, you’ll have to take out more from your traditional IRA, say an extra $15,000, and move both amounts into the Roth account.

You can contribute to your IRA account when you file your taxes. For most people this is usually around April. But conversions must be done by the end of the year. The deadline for Roth conversions is December 31st.

Why should you do a Roth conversion

Roth conversions make a lot of financial sense when you’re temporarily in a low tax bracket or receiving very little taxable income. If you’re in a situation where you’re expecting your tax bracket to rise or your taxable income to increase, then it’s best to do a Roth conversion as soon as possible.

Converting at a time when you pay less tax has the best long-term benefits for your money as it will continue to grow tax-free and you’ll never have to pay tax on it again. This is the number one reason that many people do a Roth conversion.

The second reason is that you want to avoid RMDs. If you’re planning long term, then you could aim to convert all of your money from your traditional IRA before you turn 72. This way you won’t have to take RMDs and pay tax on them. Even if it’s not possible to convert all of your money before then, by moving some money into a Roth account, your RMDs could decrease and you’ll pay less tax overall.

The step-by-step process of a Roth conversion

If you’re thinking about doing a Roth conversion, the first step is to speak to a financial advisor. We can help you look at the whole picture and gauge whether it makes sense for your money.

We take a look at your current tax bracket, what future tax brackets we can expect, and if it’s the best year to make this type of conversion. We also involve CPAs who can help us decide how much to convert and navigate tax brackets.

Speaking to a financial advisor will also help you determine what your goals are for your money. We’ll help you understand why a Roth conversion may or may not help you reach those goals, and then once you’re happy, the process is as simple as moving money from one account to another.

So, if you’re considering a Roth conversion or have any questions about IRAs and what they can do for you, then reach out to us. You can book a complimentary 15-minute call with a member of our team to discuss which avenue is right for you. Book your call today to get started!