Top 2 Benefits Of Roth Conversions At The Height Of Your Career
Are you in your peak earning years and looking for ways to optimize your retirement strategy? This article will explore three compelling reasons for considering Roth conversions. Discover how converting your traditional retirement accounts to a Roth IRA can offer significant tax advantages, provide more flexibility in retirement, and potentially maximize your long-term financial security. Take advantage of these insights that could make a big difference in your retirement planning:
Concerns About Future Tax Rates
The individual tax code is scheduled to expire, or "sunset," on December 31, 2025, increasing marginal tax rates. While this doesn't automatically mean you'll pay more taxes, it could raise the cost of performing Roth conversions.
Currently, the national debt stands at about $35 trillion, according to U.S. Treasury data—a staggering figure. Two main ways to address this are raising income or cutting spending. However, like a zip tie, spending tends to move in only one direction—upward. Therefore, increasing income, particularly through taxes, seems inevitable. If you're concerned about future tax rate hikes, a Roth conversion can help you secure today's marginal tax rate and avoid potentially higher rates later.
Substantial Savings in Pre-Tax Accounts
Your strong earning power has allowed you to save significantly. Imagine you're 55, earning $250,000 annually, and have accumulated $2 million in pre-tax accounts. If your investments grow at a rate of 7.2% per year until you reach the age of 75 and must take mandatory distributions, your retirement account balance could grow to about $8 million.
Assuming you withdraw 4% in your first year, your required minimum distribution (RMD) would be $320,000, potentially pushing you into a higher tax bracket than you're in today.
While it might be tempting to wait until retirement to take advantage of lower tax rates, converting up to the top of your current tax bracket could be beneficial if you anticipate higher future marginal rates.
It's crucial to have a tax projection as part of your financial plan. If your advisor hasn't provided one, be sure to request one.
Remember, there are exceptions to every rule. The essential rule for Roth conversions is confidence that today's rates are lower than tomorrow's. If you're nearing retirement, your tax rate may drop once your income ceases. Please rely on your financial planner and their tax projections to compare current and future rates specific to your situation.
