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A Key Strategy in Tax-Efficiency: Roth IRA Conversions

A Key Strategy in Tax-Efficiency: Roth IRA Conversions

December 08, 2021
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Celebrating the holidays with your family, ringing in a new year, and setting new year’s resolutions are not the only topics that should be on your mind as 2021 comes to an end. Now is the time to discuss tax-saving options with your CPA you should advantage of before 2022 arrives. 

Many popular tax-planning strategies are being discussed right now in the legislation. However, timing is of the essence to consider any year-end adjustments to lower your next tax bill. 

Strategy: Backdoor Roth IRA

Many investors rely on a backdoor Roth IRA or a Roth conversion. This occurs when you move assets from a traditional IRA or a qualified employer-sponsored retirement plan like a 401(k) and transfer those assets to a Roth IRA. You can use an existing traditional IRA or open a new account specifically for the conversion. But why do this? 

To keep it simple, this strategy is a way for investors or typical high earners to take advantage of the benefits of a Roth IRA to maximize the potential for growth.

Letting Your Funds Grow 

The key benefits of a Roth IRA are the growth of your investments within the account and withdrawals are tax-free. Letting your funds grow in a Roth IRA once the conversion has taken place is a surefire way to avoid taxes in the future on the growth of the account. 

With a traditional IRA, you are forced to take Required Minimum Distributions (RMDs) each year after your reach age 72, even if you don’t want to – leaving you with no possibility of tax-free growth or withdrawal on your account. However, a Roth IRA does not require RMDs during your lifetime, so your funds can stay put in the account and keep growing year over year. 

This can be advantageous on tax-saving for the possibility of higher tax rates in the future, used as an estate planning tool to pass on tax-free assets to beneficiaries, or as a tax-diversification tool to create a healthy mix of investments.  

Understanding what tax bracket you will fall into when you reach retirement is critical. The initial conversion itself is taxed, so it’s typically advised to avoid this strategy if you must use retirement savings to pay it. There are always potential liabilities when converting funds to different types of retirement accounts, and it’s best to meet with a member of our team to discuss if this strategy is right for you or if you qualify.

This is simply one tax-efficient way to save for the future and maximize the potential for growth. Our team of financial advisors is licensed to evaluate and secure individual investment products that best fit your situation and personal risk tolerance. This could include mutual funds, annuities, common stocks, and more. If you have further questions, we encourage you to meet with a member of our team.´╗┐

Keep in mind this blog is for informational purposes only.