The Roth Advantage Part 3: Roth Conversions

February 21, 2018

Dan Kresh FPQP ^TM

If your income is above the limit to contribute to a Roth IRA , that doesn’t mean you can’t get money into one. No matter your income (assuming your less than age 70 ½ and have earned income) you can contribute to a Traditional IRA. There may be limits to the deductibility of contributions for high income earners, but non-deductible IRA contributions could be made at any income level.
There’s a perfectly legitimate workaround to get funds into a Roth IRA indirectly; regardless of your income, if you pay income taxes on the funds going in. The Roth Conversion or “back door” enables you to convert funds from a Traditional IRA to a Roth IRA . This could allow you to convert contributions each year or convert any amount (principal or interest) to a Roth.
With a conversion, typically, the entire amount you convert, whether it’s deductible contributions or profit, counts as income in the year you convert . Consulting a tax professional is recommended if you are considering Roth conversions. Depending on your individual circumstances, and time horizon, converting to a Roth could be financially beneficial.
In my opinion, if your IRA contributions are already non-deductible due to your income, it’s a no-brainer to convert those contributions to a Roth each year. It’s a win-win. If your IRA would have after-tax money anyway, why shouldn’t you take advantage of the Roth? I think the only valid benefit of a traditional IRA over a Roth IRA is the deductibility and if that’s already off the table I would go Roth all the way.
In addition to converting new contributions each year you also can convert any and all of the funds you have accumulated in a traditional IRA. Since the entire amount converted could be counted as income in the year you do it, there should be careful tax planning, with a tax professional, regarding a Roth conversion strategy. This may be something you spread over multiple tax years.
You may have unique onetime deductions, in certain tax years, for a variety of reasons that ease the pain of the conversion. Perhaps you would be due a refund, equal to the tax liability of the conversion. Would the benefits of the Roth IRA be worth more to you than the refund? Maybe you’re at a crossroads in your career and your income is abnormally low, due to searching for a new job or going back to school. Maybe you bought a house and or solar panels and have extra deductions and credits. The list goes on and on.
I think, objectively, if you’re investing your retirement money and it grows, the longer your investments are in a Roth the more advantageous it is. I am more than happy to meet with you to discuss setting up a Roth IRA or facilitate a meeting with you and your tax professional to discuss a strategy for conversions. You work hard for your money, we work hard so your money can work for you.

https://www.irs.gov/retirement-plans/roth-iras
https://www.irs.gov/retirement-plans/plan-participant-employee/2018-ira-contribution-and-deduction-limits-effect-of-modified-agi-on-deductible-contributions-if-you-are-not-covered-by-a-retirement-plan-at-work
https://www.irs.gov/forms-pubs/about-form-8606
https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-iras-rollovers-and-roth-conversions
If you have a mix of deductible and non-deductible contributions in a Traditional IRA there is added complexity in the proper tax reporting of conversions. If converting a Traditional IRA to a Roth IRA, you will owe ordinary income taxes on any previously
deducted Traditional IRA contributions and on all earnings. A conversion may place you in a higher tax bracket than you are in now. Because Roth IRA conversions may not be appropriate for all investors and individual situations vary we suggest that you discuss tax issues with a qualified tax advisor.

You should always consult a tax professional and though this piece contains some tax information it should not be considered tax advice.

Why deducting SALT may be good for your financial health

 

November 29th, 2017

Michael D. Kresh CFP® RF

Dan Kresh RP®

Limiting salt in your diet may be good for your body, but losing the ability to deduct SALT from your taxes may be bad for your wallet.  State and Local Tax (SALT) deductions enable millions of Americans to itemize their deductions and take home more of their money.  The Senate and House want to limit or eliminate the deduction of SALT from your taxes which could result in many middle-class earners pocketing less of their paycheck. 

Your federal tax bill is based on your adjusted gross income (AGI). Without the ability to deduct SALT, many people who currently itemize their deductions will just use the standard deduction.  Though the standard deduction will be higher, and the tax brackets would be lower, this will mean a higher adjusted gross income for many.  If your AGI goes up enough, you will take home less. 

The tax reform proposals from both the House and the Senate are currently looking at killing the deduction for state income, property and sales taxes. Hey, wait a minute, will I be punished if I live in a state will high SALT[ii]? In fact, according to the nonpartisan Joint Committee on Taxation “Congressional analysts are estimating that the Republican Senate tax bill would increase taxes in 2019 for some 13.8 million U.S. households earning less than $200,000 a year.”[iii]

According to the Daily News, in New York “A whopping 3.2 million people claim the deduction statewide, with 85% of those residents make less than $200,000 a year...”[iv] The Washington Post reported also reported, “what has been widely overlooked is that residents of well-to-do suburbs in red and blue states across the nation — including here, just north of Atlanta — could find themselves in a similar tax squeeze.”[v] So as we have seen above, nearly 14 million taxpayers nationwide making less than $200,000 could see their taxes increase. So where is the middle-class tax break that we were promised?

Let us look at three hypothetical taxpayers based upon our client mix.[vi]

SALT

Income         Property tax    State income tax       AGI 2017             AGI 2018   Projected Federal Tax increase%

$200,000     $30,000             $12,500                      $143,400            $176,000                    24%   

$110,000      $18,500            $7,250                        $69,437               $86,000                     14%   

   $75,000      $12500           $5,500                         $41,900               $51,000                      7%

As you can see from the illustrations above, if you are a homeowner in New York, significant increases in your taxes may be a possible outcome from the Tax bill.  Most New Yorkers making $200K or less would probably not consider themselves wealthy, yet here we are with rising taxes. Although we are not sure that this bill will pass, there is still time to talk with your tax advisors to see if you can do anything before Dec,31 to soften next year’s tax blow. 

Though this article contains tax information it should not be considered tax advice.  We recommend consulting a tax professional and would be happy to facilitate a meeting with you and your tax professional to navigate the changing landscape together.

 

 



[i] State and Local Taxes

[ii] Senate Tax Plan Diverges From House Version, Highlighting Political Pressures New York Times NOV. 9, 2017

[iii] CNBC.com 11/13/2017

[iv] GOP tax plan would deal huge blow to millions of New Yorkers by ending state, local property tax deductibility NY dailynews.com

[v] The Washington Post washingtonpost.com 11/09/2017

[vi] The calculations above deal mostly with property and state tax issues and are based upon the Senate’s tax tables. Because of the loss of State and Local Tax deductions homeowners may only be able use standard deduction and therefore loose other itemized deduction. There are many more factors to review. 

The Roth Advantage Part 3: Roth Conversions
The Roth Advantage Part 1: The Basics

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