This week’s Tuesday Tip focuses on Roth conversion strategies. More specifically, I’ll address “Empowering New Beginnings: Navigating Roth Conversion Strategies and Tax Impacts.” Please watch the video below to learn more. If you would like a free review of your current financial situation, please use this link to schedule a free call. You can find an edited transcript below the video.
Introduction
Hi. Phil Weiss of Apprise Wealth Management here with another Tuesday Tip.
This week’s Tuesday Tip focuses on Roth conversion strategies. More specifically, I’ll address “Empowering New Beginnings: Navigating Roth Conversion Strategies and Tax Impacts.”
For women embarking on new beginnings, tax strategies can make a big difference. Today, we’re diving into an important financial topic that can have a significant impact on your journey forward. I’ll be exploring the world of Roth conversion strategies and how they can affect your financial outlook. In this video, I’ll walk through three scenarios that shed light on how tax rates can influence the outcome of Roth conversions. So grab a cup of your favorite beverage, get cozy, and let’s get started!
Scenario 1
In the first scenario, your current and future tax rates will be identical. Imagine this: you have $100,000 tucked away in a traditional IRA. Your current tax rate stands at 22%, and it doesn’t change in the future. As time goes by, your IRA doubles in value, becoming $200,000. When it’s time to make a distribution, taxes of $44,000 are deducted, leaving you with $156,000. Now, let’s talk about a Roth conversion. You decide to convert that $100,000 to a Roth IRA, still at a 22% tax rate. After conversion, you’re left with $78,000. This amount also doubles in value and turns into $156,000 – the same as before. In essence, absent the time value of money, there’s no difference. Remember, that since your money is invested the same in both cases, if tax rates don’t change, the value of your portfolio won’t change either.
Scenario 2
Let’s move to the second scenario. This time your current tax rate is less than your future tax rate. Picture this: your $100,000 in a traditional IRA has grown and doubled. Your current tax rate remains at 22%, but there’s a twist. In the future, your tax rate will increase to 28%. That’s when you withdraw the money. You pay taxes amounting to $56,000, resulting in a net distribution of $144,000. Now, let’s consider the Roth conversion. Converting at the initial 22% tax rate leaves you with $78,000. This amount also doubles and becomes $156,000. So here’s the takeaway: if your future tax rate is higher than your current rate, the Roth conversion at the lower rate can leave you with more money. In this case, $12,000 more, a clear advantage.
Scenario 3
Let’s take a look at one more scenario. This time, your tax rate falls over time. Your $100,000 in a traditional IRA doubles in value. Your current 22% tax rate drops to 18%. After paying taxes of $36,000, your net distribution amounts to $164,000. Shifting gears to the Roth conversion side, the 22% tax rate leaves you with $78,000. With the same doubling effect, you reach $156,000. Here’s the catch: if your future tax rate ends up lower than your current rate, the Roth conversion strategies might not be as favorable. You’d have $8,000 less in this case.
What Can We Learn?
So, what’s the strategic takeaway from these scenarios? One crucial aspect of the Roth conversion strategy is the power of protecting yourself from higher tax rates in the future. By converting your funds now at a favorable rate, you can potentially save more in taxes down the road. Of course, we can’t predict the future with absolute certainty, especially when it comes to tax legislation. As of now, the current tax rates are set until the end of 2025, after which we’ll revert to a previous tax system with higher rates. While my crystal ball is never anything but cloudy, it’s reasonable to assume that future tax rates will be higher rather than lower than they are today.
Conclusion
In closing, tax rates represent one of the key factors to consider when evaluating Roth conversion strategies. Your future tax rate could be higher for several reasons: For example, 1. You saved a meaningful amount in your IRA. This results in large required minimum distributions. 2. Your spouse passes away. You now get taxed at the single rate rather than married filing jointly. Based on your income, the tax rate for those filing as single is higher. 3. Current tax rates are low. Absent further legislation, future tax rates will increase. 4. The fiscal environment (e.g., the size of the budget deficit) could also lead to higher rates in the future.
Ladies, as you navigate new beginnings and financial decisions, remember that each choice you make has the potential to shape your financial landscape. Whether you’re embracing the benefits of today’s tax rates or strategically planning for the uncertainties of tomorrow, the key is to stay informed, seek guidance, and make choices that align with your goals. Here’s to your empowered journey ahead!
Thank you for joining us today. If you find this video discussing Roth conversion strategies helpful, don’t forget to like, share, and subscribe for more empowering content. Until next time, stay strong and keep embracing those new beginnings.
Have a great day. Thanks for listening!
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For firm disclosures, see here: https://apprisewealth.com/disclosures/
Phil Weiss founded Apprise Wealth Management. He started his financial services career in 1987 working as a tax professional for Deloitte & Touche. For the past 25+ years, he has worked extensively in the areas of financial planning and investment management. Phil is both a CFA charterholder and a CPA.
Located just north of Baltimore, Apprise works with clients face-to-face locally and can also work virtually regardless of location.
