It has certainly been a crappy year in the stock market so far in 2022, but there is a silver lining in the form of several tax strategies we can consider since it's been a down year, and I'd like to talk to you about one of them, a Roth conversion. My name is Laura Rotter of True Abundance Advisors, and this is a discussion I'm having with all of my clients this time of year.
So what is a Roth conversion you may ask. Well, it's the process of withdrawing some money from your tax deferred account, that is, maybe your rollover IRA.. It's money that you've never paid taxes on yet, and moving money, moving that money into a Roth IRA account. That is, an account that holds money that you've already paid taxes on so that it can grow tax free, and when you eventually withdraw the money, you don't have to pay taxes and you'll never be required to withdraw the money and pay taxes on it.
A tax deferred account, on the other hand, you will be required to take minimum distributions right now, legally at age 72. Or you may wanna take distributions to create your retirement paycheck. And so when would you do a Roth conversion? When you think the taxes you'd pay now on the withdrawal from a tax deferred account are lower than what they will be in the future, either because these distributions for your retirement paycheck will bump you into a higher tax bracket, or because your required distributions by the government will bump you into a higher tax bracket.
Or maybe you think tax rates today are lower than they're gonna be in the future, and so you'll be in a higher tax bracket. If either of those are the case, let's sit down and talk about a Roth conversion, but there are some caveats. Caveat number one. When you pay taxes on this withdrawal, that will be reported as income by the IRS,
make sure you have money outside in another account to pay those taxes. Also, make sure that you don't need the money for at least the next five years, because if you do a Roth conversion and then withdraw the money within five years, you will pay a penalty to the IRS. Also, since you'll be reporting higher taxable income, make sure that this doesn't affect the Medicare premium you pay.
That premium is determined by looking at your tax return two years ago, so you wanna make sure that you don't bump yourself up into a higher cost of Medicare. . And you also might consider if you're collecting social security, that you don't bump your income up to a number where you're paying higher taxes on that social security.
So you see there's a number of things to think about. So don't try this at home. Work with a financial professional when you consider how much money to withdraw, to convert from a tax deferred account to a Roth IRA. And I would be happy to work with you on your individual situation on this. So please reach out to me either at Laura@trueabundanceadvisors.com or you can call me at (914) 222-0832.
I'm looking forward to connecting with you and having a conversation and helping you to live your life on purpose. Thank you.