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How To Get More Into Roth IRA - Retirement Income Strategy - Streamline Financial Planning

Written by Dave Zoller, CFP® | May 3, 2023 5:35:00 PM
https://youtu.be/zIU1TLxv79Y

It’s not too late to boost the value of your Roth IRA without impacting your taxes too much. If you’ve ever asked yourself if you should have more money in your Roth IRA, then this video is for you.

We help a lot of people in their 50s and 60s create their ideal retirement plan, and a common thing that we hear is, “Oh, I wish I just had more money in my Roth IRA,” or, “I wish I just started contributing to it earlier.” And we usually just remind them of that old Chinese proverb: “The best time to fund a Roth was 20 years ago, but the second best time is today.” (I think it went something like that, right?) 

You might be thinking to yourself, “Well, I can’t fund a Roth because my income is too high so I can’t contribute.” Or, “I’m already in such a high tax bracket already, it doesn’t make sense for me to do that right now, or it doesn’t make sense for me to even convert from my IRA to my Roth IRA because of that high tax bracket.” 

If you’re thinking any of those things, or if you’re looking at the value of your IRA and your 401k and you’re starting to think you might have a “tax time bomb” when you get to your seventies and then you’re forced to take out of those pre-tax accounts, I’m going to share some ways to think about your tax-efficient withdrawal strategy so that you can maximize the amount that you get into your Roth and then also pay less tax over your lifetime. So let’s zoom out for just a minute and do a quick refresher on some of these concepts before getting into the ideas.

We’ve got three main accounts that we’re talking about: your 401k, traditional IRA, and Roth IRA. As you likely already know, the traditional IRA and traditional contributions to your 401k are pre-tax accounts, meaning that the money you put in, you usually get a deduction for on your taxes, but then when it’s coming out to you, then you’re paying tax on those dollars. The Roth IRA, on the other hand, your money goes in after taxes so you don’t get a tax deduction, but when you take distributions in retirement the dollars come to you “tax-free” because you already paid the taxes.

So for many of our clients, the idea of having “tax-free” money in retirement is extremely attractive. One way to get more funds into the “tax-free” bucket is through something that is called a “Roth conversion.” When you execute one of these conversions, you end up basically paying taxes on some of your pre-tax dollars that are in your traditional IRA. Paying those taxes today might not feel great, but if we’re thinking long-term, it could make sense. It reminds us of the phrase: “Disruption always follows intention.” Like that law of the world where you decide to go exercise and you’re going to go all in and you exercise, you do it and then the next day you feel a lot worse than the day before. Or if there’s an addict that makes a positive decision to stop doing whatever he is doing, he’s going to feel a lot worse the next day. Just be aware of that feeling as you’re thinking about this Roth conversion. Know that there is going to be tax to pay, but if we can map it out and actually look at the facts and look over the long term, that’s when we can feel confident about doing it and actually you’ll feel better about doing it when you can map it out. We’re playing the long game here – it’s not how little you can pay in taxes this year. Instead, we’re focused on how to reduce the total taxes paid over your entire lifetime.

Here is how we go about evaluating if and when a Roth Conversion makes sense:

The first step is to take the current balance of your pre-tax dollars and estimate its future value. Since your Required Minimum Distributions (RMDs) will kick in at 72, we usually evaluate the value at age 73. We’re taking an educated guess here by assigning a growth rate of 6% or 7%. Next, we’re going to figure out what the RMD is at that time based on the value you just calculated. Then, add in any other income, like pensions or social security income, dividend income, or capital gains.

Finally, we need to find your current tax rate and your estimated future tax rate of 73. This will allow us to get a real idea of what you’d pay in taxes if you did a conversion today and compare that against what you’ll pay in taxes in retirement if you don’t convert the pre-tax dollars to Roth. 

When you boil it all down, there are really only a few things we can control in retirement:

  • How much we spend,
  • How we are invested,
  • How much we pay in taxes.

It might seem like we don’t control our taxes just because the government is setting the rates, but the truth is that we still have options around when and how we pay. 

For a great example of how to model this out, watch the video above and then use the DIY Retirement Planner to see if this makes sense for you. 
Or, if you’re not much of a DIY-er and want a little help, just click Get Started to explore how our team might be able to help you build your dream retirement. 

Disclaimer: Since we don’t know your specific situation, none of this information should be construed as tax, legal, financial, insurance, financial advice, or other advice and may be outdated or inaccurate. It is your responsibility to verify all information yourself. This content is prepared for entertainment purposes only. If you need advice, please contact a qualified CPA, attorney, insurance agent, financial advisor, or the appropriate professional for the subject you would like help with. Streamline Financial Services, LLC or its members cannot be held liable for any use or misuse of this content.

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Disclosures: Securities offered through LaSalle St. Securities LLC (LSS), member FINRA/SIPC. Advisory services offered through LaSalle St. Investment Advisors LLC (LSIA), a Registered Investment Advisor. Streamline Financial Services is not affiliated with LSS or LSIA. LSS is affiliated with LSIA.