Maximizing Tax Efficient Retirement Savings Question... - The Prepare Institute: Preparing Americans for Retirement

Maximizing Tax Efficient Retirement Savings Question…

“Hello.  My wife and I are 65 years old and still working.  We plan to retire in a few years.  Until then, we are saving money for retirement.  One way we save is by contributing to our Roth IRA’s each year, maxing them out at $7,000 a piece.  We are also trying to get more tax efficient because we believe tax rates will be much higher in the future.  So, we are considering doing a Roth conversion this year.  However, we are afraid that if we do a Roth conversion then we will not be eligible to make our Roth contributions.  Will that happen? Thank you.”  Chris and Lori

This is a great question, especially for those who are trying to maximize their retirement savings while getting more tax efficient.  There are two ways to get money into your Roth IRA: making annual contributions, which require you to have compensation during the year and have income that falls below the annual phaseout threshold limits; and converting money directly into a Roth IRA from other pre-taxed retirement plans.

Let’s start with Roth contributions.  To be eligible to contribute to a Roth IRA, you must have earned income and your modified adjusted gross income can’t exceed the annual phaseout threshold limits. The threshold limits vary depending on your filing status and the year because the Internal Revenue Service updates them for inflation.

Now let’s look at conversions.  There are not any qualifying rules for Roth conversions, so anyone is eligible to do them at any amount as often as they like.  Now, even though Roth conversions count as taxable income, they are not included in your modified adjusted gross income. The IRS makes a special tweak in the modified adjusted gross income formula that takes out any income from a Roth IRA conversion. So, for example, let’s say you do a $100,000 Roth conversion this year, and your combined gross income from work is $150,000. When you go to figure your modified adjusted gross income, you take out that $100,000 so your modified adjusted gross income is only $150,000 and you are still eligible then to contribute to Roth IRAs.

So, the good news is that if you are otherwise eligible to contribute to Roth IRAs, then any Roth conversions you do in the same year will not change that eligibility.  That of course is a big help for people who are trying to maximize their retirement savings while becoming much more tax efficient.  To get the answers to many more retirement planning related questions and details on all the updated rules, laws and guidelines as it relates planning your retirement, visit the Prepare Institute website (www.theprepareinstitute.org) and find a retirement course 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.