April 2021 Question Of The Month

By Admin Prepare

April 7, 2021

“Hello. I am worried about future tax hikes, especially with all the stimulus packages lately and President Biden’s new infrastructure plans. Should I start converting my IRAs and 401(k)s to a Roth IRA now, and if so, what is the best way to do this?”

Thank you for sending in your question. We have been receiving more questions on this topic than ever before. That is because tax increases are on the minds of many people, especially pre-retirees and retirees, because the majority of retirement savings is in pre-tax accounts. Thus, tax increases could be a major factor and/or problem for their retirement plans.

The benefit of Roth IRAs is that they allow money to grow and be distributed tax free. In addition, distributions from a Roth IRA do not count in the provisional income formula which can cause your Social Security income to be taxed. Also, Roth IRA funds are passed on to beneficiaries tax free as well.

You can get money into a Roth IRA through contributions each year if you have earned income, and it is within the income phaseout limits. However, anyone can get money into a Roth through a Roth IRA conversion. You simply open up a Roth IRA account and fill out a Roth conversion form with your custodian to instantly transfer the money from a taxable account to a tax-free account. You pay income taxes on the amount converted at whatever income tax bracket you are at currently for the year of the conversion.

So, should you do this or not? Well, that depends on a few factors. The main one is the tax factor. Since money in a pre-tax retirement account is taxable at some point, the goal is to get the tax owed on that money paid at the lowest tax rates possible. So if you feel tax rates this year will be lower than in the future, then yes, you probably should be doing some Roth conversions now. There is strategy in doing this move. Should you convert all your money or parts of it over the next few years? You should at least convert an amount that is enough to fill out your current tax bracket, if that bracket is the lowest you will ever be in.

There are other factors to consider here as well that must be examined and evaluated before making Roth conversions. To get all the details on this topic and gain valuable information and education on all areas of retirement planning, visit the Prepare Institute website (www.theprepareinstitute.org) and find a retirement course or class near you.

Content is for educational and informational purposes only. It is not intended to be used as the sole basis for financial decisions, nor should it be construed as advice designed to meet the particular needs of an individual’s situation. You should contact your retirement and tax professional before utilizing any of the information in this article.