The most successful investors understand early on to not worry about the things you cannot change and to focus on the things you can. Even though there are only about 10 weeks left in 2019, there may be something you can do to improve your future, reduce taxes and provide a tax-free legacy.
One way to possibly do all three of these is through a Roth conversion. According to Ed Slott, CPA, “It’s an optimal time to do Roth conversions because tax rates are low and tax brackets are wide. You can go up to over $300,000 as a married-joint filer and still stay in the 24 percent bracket.”* Then after you pay the taxes on the amount you converted from a traditional or rollover IRA to a Roth, you can enjoy tax-free benefits on the principal and any amount of gain after five years.
Check with your financial or tax adviser and see how much you can fill up your current tax bracket and only convert up to that amount. That way you are controlling how much tax you pay and in what year. While we don’t know what tax brackets will be in the future, we do know that with the 2018 tax law change, the lower brackets were expanded, allowing more income to flow in without jumping into higher tax brackets too quickly.
Roth IRAs can be valuable on several fronts:
•You can invest your longest-term, highest-growth investments in an account that will grow tax-free and never pay taxes on the gain.
•You can reduce the amount of your Required Minimum Distributions (RMDs) at age 70 1/2 since there are no required distributions for the owner or their spouse on Roth IRAs.
• You can provide tax-free income for your spouse who may survive you. This avoids the “widow’s penalty” where the income may remain substantially the same (except for the smaller of the two Social Security checks stopping) but the taxes increase since the widow(er) now must file as a single taxpayer after a time.
• Your beneficiaries can inherit a Roth IRA tax-free. Even though a non-spouse heir is required to take RMDs from a Roth, the distributions will be tax-free. This is a great legacy tool, to leave assets growing tax-free for the next generation.
It is best to create a strategy over your work and retirement years to determine the optimal time to consider a Roth conversion. Usually the first year of retirement, perhaps before any pension or Social Security starts, you may have an unusually low tax year. Don’t let this opportunity pass without considering if a conversion would be beneficial to you.
Retirement plans always look better when there is access to a tax-free investment account. Often in retirement, taxes don’t always drop much if your standard of living is the same, and if you must withdraw your living expenses from a pre-tax IRA or retirement plan. Therefore, there may be a benefit to planning to convert before year-end if this is a low-income year. You also may want to convert when your account positions are low in value. Sometimes this can happen after a stock market adjustment, or after mutual funds pay out fourth quarter distributions.
*Investment News interview, May 17, 2019. Ed Slott is a nationally recognized expert on IRAs.
Patricia Kummer has been a Certified Financial Planner and a fiduciary for over 30 years and is Managing Director for Mariner, LLC d/b/a Mariner Wealth Advisors, an SEC Registered Investment Adviser. Please visit www.marinerwealthadvisors.com for more information or refer to the Investment Adviser Public Disclosure website (www.adviserinfo.sec.gov). Securities offered through MSEC, LLC, Member FINRA & SIPC, 5700 W. 112th Suite 500, Overland Park, KS 66211.
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