Financial Planning Fridays #119: Roth Conversions

Hi Friends, This week we wanted to show you how Roth Conversions may save you taxes, potentially add a huge amount to your future wealth, and increase the chances to reach even more of your goals in retirement. A Roth Conversion is when you move funds from your IRA to a new or existing Roth IRA. The funds will then grow tax free for your lifetime And then even continue to grow tax free for up to 10 years after you pass away for your beneficiaries. Although the transfer adds to your taxable income for the year, the plan is that by making this conversion at the right time, you will likely save on taxes in the future. It is important to look at your financial plan and estimate what your future taxes are going to be. This is something that we always do at Presilium. A few examples of ideal candidates who should consider this are: A new retiree who is not yet taking required minimum distributions from their retirement accounts and is able to withdraw their retirement spending funds from a post-tax account. Someone who plans to make a large charitable donation that would offset some, or all, of the income from their Roth Conversion. Someone who believes that tax rates are likely to increase in the future. These are all criteria that should be reviewed on an annual basis. Let us walk you through an example using the first type of ideal candidate. A 60-year-old couple retires and begins spending $200,000 per year in retirement. They each have $1 Million saved in a traditional IRA and $2 Million saved in a joint investment account. If they convert $100,000 to a Roth IRA each year for the first ten years of their retirement, and the tax rates stay the same, they would have saved approximately $600,000 in taxes by their 90th birthdays. The reason they save so much in taxes is they are converting the funds while they are in a relatively low tax bracket instead of paying a higher rate after they begin collecting social security and have required minimum distributions. By keeping the 600,000 dollars invested, instead of paying it in taxes, their investments continue to grow and end up increasing their overall portfolio value by an additional $1.7 Million by their 90th birthdays. This can be an enormous amount to either spend in retirement or pass on to your beneficiaries. We are always happy to discuss this with you and to model a potential Roth Conversion in your financial plan to see the impact it may have on your family’s financial future. Thank you and we look forward to talking with you next Friday. Be on the lookout for our next Financial Planning Fridays episode. Subscribe to our Youtube Channel so you never miss an episode. Or contact us directly; schedule your 15-minute call with us today.