Dol­lars & Sense

A Roth IRA could make more dol­lars and sense for your re­tire­ment

RSWLiving - - Departments - BY MAR­SHA MCDON­ALD Mar­sha McDon­ald is a fi­nan­cial ad­vi­sor with Ad­van­tage Re­tire­ment Group with of­fices in Fort My­ers and Naples.

Reeval­u­at­ing the Way You Save

You may have no­ticed a lot more buzz about Roth IRAs lately. I know I have. Clients are very in­ter­ested in learn­ing about them and whether or not con­vert­ing their tra­di­tional IRAs to a Roth may be the right move for sav­ing tax dol­lars in re­tire­ment. If you’re a baby boomer like me, you’ve fo­cused most of your ac­cu­mu­la­tion years on de­fer­ring taxes through tra­di­tional IRAs and 401Ks. The premise was that it would be bet­ter for us to pay taxes in our re­tire­ment years be­cause we would likely not be earn­ing as much money and there­fore be in a lower tax bracket.

But with the na­tional debt at some $18 tril­lion now, we’re all ex­pect­ing taxes to in­crease and re­al­ize we may not be pay­ing less tax but ac­tu­ally pay­ing more in our re­tire­ment years. So, a lot of savvy in­vestors have be­gun to run the num­bers and de­cided that con­vert­ing to a Roth over time could be the wis­est de­ci­sion they could make and here’s why.

While the Roth re­quires that tax be paid on the con­tri­bu­tion, it is al­lowed to grow tax-free and be taken out with­out pay­ing ad­di­tional tax. How­ever, there are re­stric­tions. You can only put in $5,500, or $6,500 if you are 50 or older by De­cem­ber 31st of that year, and that would be the max­i­mum con­tri­bu­tion whether a tra­di­tional IRA, Roth or a com­bi­na­tion.

In ad­di­tion there are in­come re­stric­tions. Con­tri­bu­tion lim­its are determined by your AGI (ad­justed gross in­come). Mar­ried fil­ing jointly and qual­i­fy­ing widow or wid­ower, mar­ried fil­ing separately, sin­gle head of house­hold, and mar­ried fil­ing separately and living apart have dif­fer­ent con­tri­bu­tion lim­its. You can find your ap­pli­ca­ble con­tri­bu­tion re­stric­tions on the IRS web­site, irs. gov/re­tire­ment-plans.

If you de­cide that you would like to con­vert your tra­di­tional IRA to a Roth the process is fairly sim­ple. You start by no­ti­fy­ing your ex­ist­ing IRA trustee/cus­to­dian that you want to con­vert all or part of your tra­di­tional IRA to a Roth IRA and they will pro­vide you with the nec­es­sary pa­per­work.

You can also open up a new Roth IRA at a dif­fer­ent fi­nan­cial in­sti­tu­tion, and then have the funds from the tra­di­tional IRA trans­ferred di­rectly to your new Roth IRA. The in­sti­tu­tion to which you are trans­fer­ring would pro­vide the forms in that case. Or, you can have the trustee/cus­to­dian of the tra­di­tional IRA cut you a check then you can de­posit it into your new Roth within 60 days. The in­come tax con­se­quences are the same re­gard­less of the method you choose.

You also need to con­sider how much and the tim­ing of trans­fer­ring funds to make sure you se­lect the man­ner that is

WITH THE NA­TIONAL DEBT AT SOME $18 TRIL­LION NOW, WE’RE ALL EX­PECT­ING TAXES TO IN­CREASE AND RE­AL­IZE WE MAY NOT BE PAY­ING LESS TAX BUT AC­TU­ALLY PAY­ING MORE IN OUR RE­TIRE­MENT YEARS.

most ben­e­fi­cial to you. Your CPA or fi­nan­cial ad­vi­sor can as­sist by cal­cu­lat­ing the con­ver­sion tax for you to see what works best for your par­tic­u­lar sit­u­a­tion.

All writ­ten con­tent is for in­for­ma­tion pur­poses only. It is not in­tended to pro­vide tax or legal ad­vice or pro­vide the ba­sis for any fi­nan­cial de­ci­sions. All in­for­ma­tion and ideas should be dis­cussed in de­tail with your in­di­vid­ual ad­vi­sor or qual­i­fied pro­fes­sional be­fore mak­ing any fi­nan­cial de­ci­sions.

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