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Tax Rate Insurance Earn too much to contribute to a Roth? Congratulations! But there is still a way you can contribute. The process of contributing is often called a Backdoor Roth contribution.
Roth assets protect widows from jumping tax brackets when they file their taxes as Single instead of Married Filing Jointly. By doing Roth conversions, you could increase your spouse’s financial security by reducing future taxes. Will Thompson, CFA®, CFP®, AIF®
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Finally, those with large IRAs and few beneficiaries might consider Roth conversions to keep more within the family. Why? Inherited IRAs must be fully distributed by the end of the tenth tax year after the contributor’s death. Imagine an heir that inherits a $1 million IRA. The heir must take at least $100,000 out per year for ten years to fully distribute the inherited IRA. This would likely cause the heir to jump tax brackets, resulting in the IRS getting more.
he other day a client nearing retirement brought us his 401(k) statement. There was a little over $1,000,000 in the account. He smiled as he looked forward to enjoying leisurely afternoons with his wife, spending time with his grandkids, and cruising on the Mediterranean. Sadly, he did not realize that the IRS would be tagging along on those cruises. That is because his 401(k) assets are pre-tax, meaning he will owe tax when he starts taking distributions to support himself in retirement. How much Do you have health insurance? of that $1 million is his and how much is What about insurance on your car and the IRS’? No one knows, which is scary. home? Would you like to have tax rate insurance? That is what Roth IRA Congress is currently considering a bill assets provide. that could significantly increase your taxes. We have no idea what the final bill will look like, but we can take steps today to protect against this and future tax increases. Roth IRAs and Roth 401(k)s offer protection from higher taxes. With a Roth, you do not get a tax deduction for contributions, but you enjoy tax-free growth and distributions in retirement. All your Roth assets are yours, not yours and the IRS’. If you have pre-tax assets in an IRA or 401(k), consider doing Roth conversions. Roth conversions are when you convert all or a portion of your pre-tax IRA or 401(k) into a Roth. You will owe tax on the conversion, but it is better to pay tax today at a lower rate than in the future at a higher rate. It is best to pay the tax with funds held outside your retirement accounts. There is no income limitation to be eligible to do a Roth conversion.
Money Talks by Jay Chapman, CFP® All the opinions expressed in this article are that of the authors and should not be considered financial advice for your individual portfolio. If you would like to learn more about this topic or have your complimentary portfolio reviewed please contact Jay Chapman, CFP® at Chapman
Capital Advisors
772-320-9658 or email Jay@ChapmanCapitalAdvisors.com
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