Now is the time to consider a Roth IRA OR Roth 401-K plan. Open a new account using after tax dollars OR use funds from a traditional IRA or 401-K by converting some of these funds to a Roth plan.
As stated in an earlier blog posted on June 19, 2013, the Roth is a long term savings/investment account that you can add to annually or withdraw with NO penalty OR tax upon withdrawal. Please review this blog for additional details.
Is a Roth account right for you? Savers/investors reap the most benefits from conversions because they have plenty of time to accrue earnings that will offset conversion taxes. Opening a Roth account is also a good idea if you think you will be in a higher tax bracket during retirement.
When converting from a traditional IRA/401-K you need to determine how to pay the tax upon conversion. Other sources, instead of using the funds from the traditional accounts can be used to pay the taxes. Some sources to consider are:
1. Use funds from a regular savings account or C.D. that has come due. The returns on those accounts probably will not match the long term growth on the Roth account.
2. Sell stock even though it is a taxable gain/loss event. The capital gains rate is normally lower than using funds that are taken from your retirement account to pay penalties and/or taxes.
3. Ask your beneficiaries to help pay the tax NOW. When they inherit a traditional IRA they will owe the tax on the RMD. When they help to pay the tax NOW, they reduce their taxes in the future WHEN they inherit the ROTH. If your beneficiaries are in a higher tax bracket than you are this option makes sense for all of you.
4. Stagger the amount converted. Consider converting small amounts over a few years instead of all at once. This approach may prevent putting you in a higher tax bracket when converting a substanial amount in one year.
Remember the taxes on converting to a Roth is a hurdle; NOT a barrier. This is an excellent long term program. These funds can be passed on from generation to generation with tax free earnings. There is still time to set up these accounts. Your financial advisor will be able to discuss your particular situation and help you overcome the hurdle.