We recently had the chance to work with a couple of investors who were in a unique position. They are in their early 60s, he just retired, and she is still working. They wanted to start converting part of their traditional IRA to a Roth IRA to minimize their required minimum distributions in roughly 10 years. The catalyst is that in 10 years, she would likely be a single taxpayer as he was facing serious health problems.
On the surface, this makes sense—they have decreased income with his retirement and have the benefit of the married filing jointly status now. Ideally, they could convert part of their IRA to a Roth without being bumped into a new tax bracket, thus, keeping their tax bill substantially the same. The benefit of the Roth IRA is that taxes are paid today on the amount converted, and it grows tax-free until withdrawn. In later years, a Roth can provide an investor with tax-free income or be a tax-free inheritance for heirs.
However, there are many moving parts to this financial move. They need to consider if he is receiving Social Security now that he has retired. Does he have pension income? Do they have income outside the IRA to pay the taxes due on the conversion? Do they have a source of income that they are able to live on?
We recommend considering a Roth conversion on a year-to-year basis. If investments are down because of a market pullback, investors may consider converting specific assets that have been beaten up but are still solid long-term holdings. A tax adviser or CPA can help an investor convert just enough to stay within a current bracket and can help determine what deductions or benefits investors may have to forego at certain income levels.
Depending on the investor’s age, health insurance will be an additional cost until they are eligible for Medicare. Medicare premiums are $164.90 a month in 2023 and are generally deducted from your Social Security benefit. Income-related monthly adjustment amounts begin when modified adjusted gross income reaches $97,000 for single and $194,000 for married filers. Furthermore, if he is facing serious health problems, increased medical expenses may affect their cash flow.
Additionally, 10 years is a long time in finance. A lot of changes could happen between now and then. The SECURE Acts have changed the rules for both RMDs and inherited IRAs twice in the last three years. While we generally recommend developing plans based on today’s tax laws, plans must be flexible to accommodate tax law changes. While we assume taxes in general will be higher in the future—in this case, we know taxes will be higher for her as a single filer.
Overall, these investors have done the work to invest in their future and are on a path to continue making decisions that will be financially beneficial. While we understand the desire to minimize future taxes, the reality is that taxes are one of the results of successful investing.
If you have questions on financial moves that may affect your future, the experts at Henssler Financial will be glad to help:
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- Email: experts@henssler.com
- Phone: 770-429-9166
Listen to the February 18, 2023 “Henssler Money Talks” episode.
This article is for demonstrative and academic purposes and is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
