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Roth Conversion Planning Opportunities

Roth Conversion Planning Opportunities


I’ve written previously about the benefits of Roth accounts, due to their flexibility before retirement, and tax diversification benefits later on in retirement. With the implementation of the new tax reform, there are additional planning opportunities for individuals to convert existing pre-tax retirement money into after-tax Roth money.

An overlooked aspect of the tax reform is that the personal income tax rates for individuals are set to “sunset” in 2025, meaning they are set to revert to the previous higher rates. This is contrary to the corporate tax rate, which is set to remain at the new lower rate indefinitely. Therefore, Roth conversions are essential “on-sale” for the next 7 years, while the personal income tax rates remain at the lower level.

In the past, to be able to convert from a Traditional to a Roth IRA your income needed to be under $100,000. The IRS rules have since changed, and there is no longer an income cap in place. With the cap removed, high-income earners can now convert as long as they pay the appropriate tax on the conversion. There is no 10% early withdrawal penalty if the funds move from a Traditional IRA to a Roth IRA within a 60-day window.

If you’re someone with little to no after-tax retirement savings, I would strongly consider converting some pre-tax retirement money into a Roth IRA. The downside is that you’ll have a tax liability in the year of the conversion. This tax can be withheld from the converted amount, but if your savings and cash flow permit, it’s best to pay the tax separately so that you can maximize the amount that’s moved into the Roth IRA.

Another potential downside and caveat to keep in mind with Roth money is the risk of changes to tax legislation. With the rise in national debt, some speculate congress may one day come after Roth IRA’s as a potential source of tax revenue. I HIGHLY doubt any changes would affect existing Roth money, as any attempt to essentially double tax money without grandfathering prior contributions would be political suicide. However, I can envision congress eliminating future Roth contributions, which makes taking advantage of conversions/contributions today even more worthwhile.  

Whether you’re looking to take advantage of the temporary lower personal tax rates, or just expect to be in a low tax bracket for the coming year, consider the benefits of converting Traditional IRA money to a Roth IRA. For individuals who are planning a work sabbatical, or are transitioning into retirement, you may be able to convert substantial pre-tax money with little to no tax liability. Make sure to consult a tax professional when evaluating your situation.


Additional Info:


Although the Tax Cuts and Jobs Act made Roth Conversions more attractive because of the lower income tax rates, they also removed the ability to recharacterize the conversion, meaning if you do the conversion you cannot undo it.

Some reasons you would want to undo the conversion or “recharacterize”, would be if you ended up in a higher tax bracket than expected, or the converted amount dropped in value because of market performance, and you, therefore, were paying taxes on a higher amount than you had converted.

So if you do consider a Roth conversion in 2018 and moving forward, it’s best to either wait until the end of the calendar year so that you have a better idea of your tax situation, or if you’re worried about poor market timing, make multiple conversions throughout the year to essentially “dollar-cost average” your conversions.

Full Disclosure: Nothing on this site should ever be considered to be advice, research or an invitation to buy or sell any securities

5 Steps to Understanding and Improving Your Financial Situation

5 Steps to Understanding and Improving Your Financial Situation

1. Determine your monthly cash flow

This means understanding what your true after-tax income is and what your fixed expenses are. Fixed expenses may include liabilities, such as mortgages or student loans. It’s important to know how much disposable income you have. Only once you know what your disposable income is can you allocate it in the most efficient manner. For you, that may mean paying down additional debt, setting aside money for a cash reserve, or increasing investment contributions for a particular goal. If you want to better understand your complete financial picture, I highly recommend the app Mint. Especially if you pay everything with a credit card it’s very easy to track a budget on Mint. If you do use Mint, don’t worry about itemizing every single transaction as much as keeping track of your entire outflow.

2. Automate savings and bill paying

It’s honestly amazing how little you need to invest these days and the costs associating with doing so. There are so many options for automated savings into diversified investment portfolios there’s really no excuse not to at least start something. Even if it’s $100 a month, you want to have the option readily available so that you can increase contributions at any moment. If you don’t take the time to establish these accounts, it’s less likely you’ll make the contributions once your cash flow permits. For fixed expenses use auto payment so that you can focus on what’s left over for discretionary spending.

3. Develop a cash reserve

I’ve wrote about this previously, and yes it’s still lame (but needs to be said)! Having 3-6 months’ (or more depending on circumstances) worth of living expenses is essential to allowing yourself the flexibility to invest the way you want to. The opportunity cost of holding that money in cash is negligible and worth it. There will always be times in life where unexpected lump-sum expenses arise. Credit cards should be seen as a secondary reserve for true emergencies.

3. Focus on improving net worth 

Paying down debt also increases your net worth. As long as you are increasing your net worth in some way, you’re moving in the right direction. In the long run, your net worth is much more important than your income. If you save and invest properly, your net worth will have the potential to fluctuate more in a single week than what you currently make in a year. It’s not what you make, it’s what you save. Again, the app Mint is a great way to track your net worth. Mint even allows for the tracking of real estate (via zillow) and vehicles (via Kelley Blue Book).

4. Use your credit card like you would your debit card

Credit cards serve a couple purposes. They serve as an intermediary to protect you from fraudulent charges (since it’s technically not your money). They provide rewards, such as cash back or travel miles. Lastly, they provide cash flow support in true emergencies. Otherwise, it’s best to treat them as you would your debit card, meaning you spend only what you have in your actual bank account so that you can pay it off in full each month.

5. Live for today while planning for tomorrow


Don’t live your life worrying about every dollar you spend. Focus on the big expenses and let automation be your friend. Understand the trade off between what really makes you happy and the extra stuff that you don’t really need. I’ve never been a fan of worrying about tracking every little expense. If going out to Starbucks with your friends for a $5 latte makes you happy, then do it. Financing a $50,000 BMW on the other hand will set you back. Focus on the major expenses in life and keep perspective on the small ones.

Full Disclosure: Nothing on this site should ever be considered to be advice, research or an invitation to buy or sell any securities