Ensuring You Get to Spend More of Your Hard Earned Money & the Government Gets to Spend Less, Ep #49
For many of my clients during the fall, I implement a powerful strategy called a Roth conversion, which can significantly lower the taxes paid during retirement. In this episode of the One for the Money podcast, I review this strategy that can help retirees spend more of their own money rather than the government. Listen to the end, where I share additional powerful tax-saving strategies you may want to consider during your employer’s open enrollment.
In this episode...
Retirement tax planning [01:20]
Timing Roth IRA conversions [05:38]
The importance of tax diversification [12:16]
When Roth conversions aren’t the best idea [13:20]
HSAs and healthcare expenses [15:19]
Planning for retirement taxes
We’ve all made poor decisions when it comes to spending. However, our spending is still way better than the government’s bridges to nowhere, costly, incomplete high-speed trains, or countless other examples of wasteful government spending. This reason is why I love helping clients keep more of their money to spend by utilizing tax-saving strategies.
These strategies are necessary because people don’t pay less in taxes accidentally. Instead, lower taxes result from executing strategies over many years and being proactive with tax planning. Most Americans have two options. They can hope taxes will be lower in the future, or they can take action to retire as diversified as possible.
Benefits of Roth conversions
Roth conversions are a great way to become tax-diversified and reduce taxes when conditions are right. Roth conversions work just as they sound, converting portions of not-yet-taxed retirement accounts to never-again-taxed accounts. There are no income limitations, but since income taxes will be paid in the year of the conversion, it makes the most sense to complete Roth conversions in the years when your income is lower.
When the math works, a Roth conversion is one of the best strategies to mitigate taxes. Most Americans save for retirement in traditional or pre-tax retirement accounts. This money will be taxed upon withdrawal during retirement. Consequently, retirement accounts are essentially co-owned with Uncle Sam. How much is owned by Uncle Same will depend on whatever the tax rates are in the future.
Reasons not to do a Roth conversion
Although Roth conversions can be a great option, there are some reasons why you may not want to consider them. Since the converted amount cannot be used for tax payment, you would have to make sure you have the tax money saved up. Also, if you expect to be in a lower tax bracket in retirement, then a Roth conversion may not be the best decision for you. If you have a child who is applying to college and seeking financial aid, a Roth conversion would show you as having a higher income, which may affect your child’s eligibility for financial aid. It’s crucial to weigh the benefits against these factors and consider speaking with a certified financial planner and a tax professional to help you make an informed decision.
Securities and Advisory services offered through LPL Financial. A registered investment advisor. Member FINRA & SIPC.
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