3 minute read
Chapman Capital Advisors
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Will ompson, CFA®, CFP®, AIF®
The other day a client nearing retirement brought us his 401(k) statement. ere was a little over $1,000,000 in the account. He smiled as he looked forward to enjoying leisurely a ernoons 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. at 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 of that $1 million is his and how much is the IRS’? No one knows, which is scary.
Congress is currently considering a bill that could signi cantly increase your taxes. We have no idea what the nal 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 o er 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. ere is no income limitation to be eligible to do a Roth conversion. Earn too much to contribute to a Roth? Congratulations! But there is still a way you can contribute. e process of contributing is o en called a Backdoor Roth contribution.
Roth assets protect widows from jumping tax brackets when they le their taxes as Single instead of Married Filing Jointly. By doing Roth conversions, you could increase your spouse’s nancial security by reducing future taxes.
Finally, those with large IRAs and few bene ciaries 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 a er the contributor’s death. Imagine an heir that inherits a $1 million IRA. e heir must take at least $100,000 out per year for ten years to fully distribute the inherited IRA. is would likely cause the heir to jump tax brackets, resulting in the IRS getting more.
Do you have health insurance? What about insurance on your car and home? Would you like to have tax rate insurance? at is what Roth IRA assets provide.
Money Talks
by Jay Chapman, CFP®
All the opinions expressed in this article are that of the authors and should not be considered nancial 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
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