I love blueberries. I also am frugal and love saving money. Because of this, when I go to the store and blueberries are not on sale, I will not buy them. Although, if blueberries are on sale, then you know I am stocking up. My freezer and refrigerator are full during those times.
Like when I buy blueberries, taxes are “on sale” right now, and you should be stocking up by opting for Roth IRAs, Roth 401(k)s and Roth conversions. Taxes are at near-record lows, and they are only expected to go up. There is a window of time before the Tax Cuts and Jobs Act (TCJA)sunsets and tax rates revert to their previous higher levels. If you are like me and like saving money, then this tax sale will save you more money than any blueberry sale.
Taxes are on sale
We already know that tax rates are set to go up in the short term, but what about the long term? We can only guess, but many experts think tax rates will rise, and few people believe taxes will decrease over time. Also, our country has more than $36 trillion in debt. My question is, how does our country earn revenue to pay off that debt? There are a few ways — including raising taxes.
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Because of the above, my favorite investment is a Roth IRA — a true gift from the U.S. government. I often ask people where they would put all their money if they had a magic wand. The obvious answer is a Roth IRA, but most of the money U.S. savers have in retirement accounts is not in Roth IRAs. Even worse, only 24% of households owned a Roth IRA in 2023, according to the Investment Company Institute.
Joe has built a comprehensive retirement planning company focused on helping clients grow and preserve their wealth. Under his leadership, a team of experienced financial advisers use tax-efficient strategies, investment management, income planning and proactive health care planning to help their clients feel confident in their financial future — and the legacy they leave behind.
But I am here to tell you about a powerful strategy that anyone can use to get a Roth IRA (assuming you have a tax-deferred investment). It doesn’t matter your income, age or employment status. This strategy is a Roth conversion, and anyone can use it if they have an IRA. Also, there are no limits on how much you can convert. You could even convert every IRA dollar you have, although we typically do not recommend doing so. I have done Roth conversions for people for as little as $1,000 to well above $300,000. It just depends on your situation!
Roth conversions are one of the more popular tax planning strategies that many people should be doing right now to take advantage of lower tax rates before the expiration of the TCJA. This is simply the act of moving your tax-deferred investments (IRA, 401(k), etc.) to a tax-free investment (Roth IRA), though a Roth conversion isn’t quite that straightforward. You have to worry about the effects of Social Security taxes, Medicare premiums, capital gains, the five-year rule and so on. So, while the concept is simple, implementing it can be a little more difficult and leaves little room for error, as you cannot change or revert a Roth conversion.
Why a Roth IRA?
The main reason why a Roth conversion makes sense can be understood by answering the following question: Would you rather pay taxes on the seed or the harvest? I am from Carroll, Ohio, a rural farming community outside Columbus. My best friend is a farmer and has an apple orchard. I asked him, “Would you rather pay tax on the apple seeds you plant or the harvest of those apples?” His answer was obvious — the seed. Roth conversions operate on a similar principle. For example, if you have $100,000, then you can pay taxes on that money now by doing a Roth conversion at a low tax rate, or you can wait until harvest and every dollar of growth during the intervening years would be taxable in an IRA.
Many clients also choose Roth conversions because, unlike a traditional IRA, with a Roth they do not have to take money out for required minimum distributions (RMDs). A traditional IRA requires you to pull out money starting in the year after you turn 73 or 75 (if you were born in 1960 or after), but some people may not need that money at that time and would rather continue growing it tax-free for their beneficiaries, surviving spouse, emergencies and more flexibility in the future.
Be prepared for the tax bill of a Roth conversion
We can’t forget our least favorite word: taxes. If you do a Roth conversion, then you must pay tax on that money today. Nobody likes paying taxes, but remember, taxes are on sale now, and you either must pay the taxes on your IRA now or later. So, next time you look at your IRA or 401(k) statement, remember that there is a name missing next to yours: Uncle Sam.
When doing Roth conversions, it is important to seek advice from a tax professional and financial professional. A small mistake can make a big impact. When deciding how much to convert, it depends on your specific situation. One thing to consider is: Do you think you will be in a lower tax bracket in retirement, or do you think you’ll be paying taxes at a higher rate in the future? The answers to those questions could help determine whether a conversion is right for you.
Lastly, I want to tell you a story about my nephew. Every year for his birthday, I do not give him a physical gift. I’m not the favorite uncle right now. Instead, I put money toward an investment for him. He is not old enough to understand how beneficial this is for him yet, but when he turns 21, he and I will be best friends. He will be taking me out for steak dinners and driving me around in his sports car, right? We apply the same concept with Roth conversions. Yes, you must pay the tax now, and it isn’t as enjoyable as getting that deduction when you file your taxes at year’s end, but remember how much you can save and how much better it will feel to have control of your taxes in the future.
A Roth conversion can save you more money than any blueberry sale!
The appearances in Kiplinger were obtained through a PR program. The columnist received assistance from a public relations firm in preparing this piece for submission to Kiplinger.com. Kiplinger was not compensated in any way.
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