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The Benefits and Side Effects of Roth Conversions

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The Benefits and Side Effects of Roth Conversions

Benefits of Roth Conversions

  • If future tax rates increase, tax-free Roth IRA income will be more valuable.
  • Roth IRAs remove the uncertainty of what your future tax rates might be.
  • RMD Benefit – Roth IRAs have NO RMDs during lifetime…….
    • Also, there are no RMDs for a spouse who moves inherited Roth IRA funds over to his/her own Roth IRA (a spousal rollover)
    • A younger or surviving spouse can extend the time Roth funds are not subject to RMDs

Side Effects of Roth Conversions

  • Roth conversions increase adjusted gross income (AGI).
  • Added Roth conversion income triggers stealth taxes and loss of tax benefits that get phased out including itemized deductions, credits and other tax benefits based on AGI, but that only happens in the year of the Roth conversion.
  • Tax on Social Security
  • Medicare Part B and D Premiums – IRMAA Charges
  • 20% qualified business income deduction
  • 3.8% tax on New Investment Income
  • Financial aid eligibility + other education-related tax benefits
  • Medical deductions – must exceed 10% of AGI– New for 2019
  • Real estate losses

There will be More Roth conversions under the SECURE Act

People who have saved $1 million or more in an IRA and plan to pass it on to someone other than their spouses should consider doing Roth conversions

With the adjustment in the RMD age, the SECURE Act provides a bigger window for Roth conversions at a time when the 2017 tax reform law has reduced marginal rates

2 Reasons to Consider Roth IRA Conversions

1. Tax Cuts and Jobs Act expiration results in higher taxes for clients in the future

The Reason: Taking distributions from tax deferred assets may result in higher taxes

2. SECURE Act results in higher taxes for  beneficiaries in the future

The Reason: Passing tax deferred asset to beneficiary may not be optimal

Quick Overview:

  • Required Minimum Distributions (RMDs) to Start at Ag 72
  • Inherited IRA Distribution: 10-Year Rule
  • Remove Age Limit of 70 for Traditional IRA Contribution
  • Miscellaneous Retirement and Non-Retirement Provisions
  • Tax Credits for Small Business

Final Point:

In the accumulation phase of life, you were saving. But, if you’re at the distribution phase now, you are drawing down your retirement assets.

“How you spend your retirement dollars in retirement IS JUST AS IMPORTANT as when you were accumulating them.”

Please consult your financial advisor and tax professional so you can Pay Less Taxes in Retirement.

Related: The Top 8 Things You Need to Know About the SECURE Act

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