Avoid passing on the ticking time bomb of taxes on qualified accounts to heirs
Update as of July 2024
As of July 2024, Epic Trust Financial Group is now Guardian Financial Group.
Perhaps you’re already contributing to an employer-provided retirement account, self-employed and wanting to start saving for retirement, approaching retirement age or already retired.
Regardless, if you don’t have one in your portfolio, you need a Roth Individual Retirement Account (IRA) in your lineup.
You might already have a traditional IRA, 401(k) or other savings plan in place, but there are a couple of things that a Roth IRA offers that most retirement investment tools don’t.
Though one pays taxes upfront on money personally contributed and those contributions aren’t tax-deductible like a traditional IRA, Roth IRAs grows tax-free for the life of the account and, when withdrawn, are likewise not subject to taxes.
Another benefit is that money contributed—not including investment earnings—can be withdrawn at any age tax-free and without IRS penalties. If investment earnings are withdrawn before age 59 ½ and the account has been held for less than five years, there may be taxes and penalties.
There is no age limit on who can open and fund a Roth IRA so long as one has earned income. Contributions can be made flexibly at any time from the first day of a given year up until Tax Day of the following year.
What makes Roth IRAs particularly unique is that one is not required to take any distributions while alive, unlike traditional IRAs and 401(k)s.
Heirs who inherit a Roth IRA also benefit from tax-free withdrawals, as long as the account was held for at least five years before the account holder passed.
This makes Roth IRAs an excellent tool for preserving money for the long-term and avoiding minimum required distributions for the account holder and their spouse. Non-spousal heirs (most commonly one’s children) are subject to minimum required distributions.
“If you’re not using it, you’re missing out on the long-term benefits of retirement income planning,” says Marc Livernois, wealth management advisor at Epic Trust.
It’s not something one has to start from the ground up either. Roth IRAs can be funded by converting, for example, traditional IRA funds.
However, it is a strategy that takes some advance planning.
As mentioned above, even if opened at age 59 ½ or beyond, the account has to be held for at least five years before earnings can be withdrawn.
There are also taxable income considerations to factor in.
“The strategy is to take some of it year by year so you keep yourself in the same tax bracket. Let’s say you have $100,000 you want to put into a Roth, and you want to convert it all this year. Well, that will be in your taxable income for the year. If you are married and both have income—even as low as $60,000 each—that will bump you up a tax bracket,” Livernois explained.
“It depends on the state you retire in too. If you retire in Washington or Florida, for example, there’s no income tax, but other states like Idaho, Oregon or Arizona do have a state income tax. The point is, if you wait until a year before you retire, you may not have given yourself enough landing strip.”
He says, too, that despite recent downward trends in the markets, all situations present opportunities.
With high inflation eroding savings among other tumultuous economic factors, Roth IRAs can serve as a good long-term wealth preservation strategy, offering growth opportunities along with the flexibility to withdraw contributions as needed.
“With the market down some 20%, it’s a good time to convert to a Roth IRA,” Livernois says. “Say that $100,000 investment is now down to $85,000. In a way, you’re getting a 15% discount to convert it to a Roth. Do you really want to wait for it to go back up to $100,000 when right now you can pay tax on $85,000 instead of $100,000?”
Either way, history shows it will grow.
Livernois cited the old adage, “People don’t see the forest for the trees. The forest is you have a lifetime portfolio plan.”
It can be daunting to set plans in motion that will affect your future finances, spouse, children or grandchildren, especially when there are a lot of factors to calculate in to ensure you make the most of your money when using a given investment tool.
Epic Trust’s wealth advisors can provide personalized guidance on the above Roth IRA conversion strategy and answer any other questions you may have about long-term investment planning. It’s as easy as setting up an appointment by calling 509-582-2047 or visiting epictrust.com/contact.
