February 23rd to February 29th, 2024 issue | Phoenix Business Journal (Page 24)
Written By: Jenna Biancavilla | Senior Wealth Management Advisor with Pearl Capital Management
Are you strategically managing your retirement accounts for maximum tax efficiency? As retirement approaches, the decision to convert a pre-tax retirement account – such as a traditional IRA or old 401(k) – into a Roth IRA can significantly impact your lifetime tax liability. If properly implemented, this strategic move can lower the taxes paid over your lifetime, taking a more global, long-term approach to tax planning.
Roth Conversion Basics:
A Roth IRA offers tax-free retirement withdrawals and exemption from required minimum distributions (RMDs). Converting from a traditional tax-deferred account to a Roth triggers taxes based on your current income tax rate, potentially nudging you into a higher tax bracket if not strategically planned for. Not only can this help lower your lifetime tax obligation, it can also be used as a multi-generational tax-saving plan for your beneficiaries.
Partial Roth Conversions & Tax Bracket Management:
Rather than converting your entire IRA balance at once, opt for partial conversions. This tax-conscious method allows annual conversions within your desired tax bracket, preventing an unwelcome leap into a higher tax bracket.
For example, a couple currently in the 22% tax bracket may face an anticipated increase to 25% in 2026. By locking in today’s tax bracket through a Roth conversion, they can potentially shield against future tax hikes.
Factors to Consider:
Critical factors such as state taxes (particularly for anticipated relocations), income fluctuations, and impacts on government subsidies (like those under the Affordable Care Act and Medicare) are essential elements to weigh when considering partial conversions.
Consultation and Expertise:
Seek guidance from a financial advisor well-versed in tax planning. An advisor offering comprehensive tax planning can forecast your lifetime tax savings derived from a multi-year Roth conversion plan, offering tailored insights for informed decisions.
Closing Outlook:
The strategy of partial Roth conversions lies in carefully controlling your current and future tax liability, a practice often termed tax bracket arbitrage. It’s about paying taxes today at a lower rate rather than risking higher rates in the future.
Remember, when it comes to securing your financial future, both making informed decisions and taking action matter. Inaction is the worst strategy, just ask any person in their mid-70s who didn’t plan for taxes and is now forced to take RMDs (required minimum distributions).
By adopting a strategic approach to Roth conversions, you can potentially maximize your retirement savings and minimize tax burdens, setting the stage for a more financially secure future preserving more funds for you and your family to enjoy.
About the Author:
Jenna Biancavilla, an experienced wealth advisor, economist and owner of Pearl Capital Management – a fee-only fiduciary financial planning firm – brings revolutionary insights with her extensive expertise in crafting customized wealth management strategies.
