Roth Conversions Could Save Some Taxpayers More than $100k in a Lifetime
Nobody wants to pay more tax than they absolutely necessary. And that’s understandable. For many of us, tax is our biggest expense.
But here’s a secret about minimizing tax: good tax planning should focus on something more than tax savings for this year.
Good tax planning focuses on saving you as much in taxes as possible in your lifetime.
And if you do it right, you could save plenty of tax.
Let me give you an example.
I have a client who retired and moved from snowy Minnesota to sunny Florida.
They have very reasonable living expenses and can fund their lifestyle from their investment portfolio without needing to pull money from retirement accounts.
Enter a Roth conversion strategy.
It sounds boring. But there’s nothing boring about saving money! So let me explain what we did.
My clients were in the 22% Federal tax bracket.
Now, they are in the 0% Federal tax bracket.
9 years from now, they'll be back in the 22% Federal bracket when the IRS forces them to take money out of their IRAs.
I know all this because I have built a multi-year cash flow and tax bracket projection as part of our LifeWealth planning process.
So here’s a question for you.
Would you rather pay 12% in taxes or pay 22%?
Why 12%, of course, which is why I proposed converting a portion of their IRA to a Roth IRA each year for the next 8 years to a total in conversions of $560,000.
They will pay 12% federal tax rates on the conversions instead of the higher expected 22% rate in the future.
Paying MORE in taxes today will lead to paying LESS in the future.
The benefits my clients will receive from having proper tax planning done by a financial advisor include:
$135,000 in estimated lifetime tax savings.*
$1,200,000 increase in end-of-life Roth IRA balance.*
$560,000 to be converted to Roth over the next 8 years
On top of these benefits, the Roth IRA will be inherited income-tax free by their heirs. On other words, their children won’t have to pay any tax on the inherited Roth IRA.
To learn more about how our LifeWealth Process can make sure you are not missing tax strategies, click here to schedule a meeting.
*Assumes current tax laws and that the clients live until 2053, with annual portfolio returns of 5.67%. The amount of tax savings and the final Roth IRA balance will vary by investment performance and actual date of death. The tax savings are driven by the reduction of required minimum distributions. Therefore, IRA balances and RMDs are lower because a portion of the IRA balance has been moved to a Roth IRA.
About the Author
Michael Urch
As a CERTIFIED FINANCIAL PLANNER,™ Michael advises his clients on insurance, investment, retirement income, tax, and estate planning. He prides himself on being a professional advisor who puts planning before products. Michael likes to start with each client’s “why.” By understanding what’s truly important to them, the “what” of investment and planning strategies can be custom-designed to support their long-term ambitions.
This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
This is a hypothetical situation based on real life examples. Names and circumstances have been changed. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investments or strategies may be appropriate for you, consult your advisor prior to investing.
