Wealth Management

understanding-after-tax-contributions-roth-401k-and-roth-ira

Understanding After-Tax Contributions: ROTH 401(k) and ROTH IRA
Understanding After-Tax Contributions: ROTH 401(k) and ROTH IRA 1600 941 smolinlupinco

Did you know that when it comes to your retirement account, not all contributions are created equal? Tax implications can have a significant impact on your savings. 

In fact, after-tax contributions to a ROTH 401(k) or ROTH IRA can offer significant tax benefits while traditional 401(k)s and IRAs don’t—just one of many reasons you might choose to include them in your overall plan for saving for retirement.

A bite-sized intro to ROTH 401(k) & ROTH IRA contributions

The phrase “after-tax contribution” means that the money you deposit into a ROTH 401(k) or  ROTH IRA account has already been taxed.

Paying taxes on the funds upfront can be convenient, but you’ll also enjoy several other key benefits: 

  • The opportunity to grow an asset on an after-tax basis and lock in a lower tax rate
  • Tax-free contributions and earnings
  • No income tax on funds withdrawn after you turn 59½ 

While contributions to a ROTH 401(k)/IRA don’t provide any current-year tax benefits, there are other long-term benefits to consider:

  • There are no required minimum distributions (RMDs) from a ROTH IRA
  • If a ROTH IRA is inherited, the new owner(s) are not required to withdraw all funds from the plan within ten years (as they would with a traditional IRA) 

Is a ROTH 401(k) or ROTH IRA right for you?

If you’re not in a high federal income tax bracket and don’t live in a high-tax state, making after-tax contributions to a ROTH 401(k) or IRA could be a good choice for you. You may also find these retirement savings options appealing if you don’t want to worry about income tax bills in retirement.  

If you’re looking for immediate tax benefits, it’s important to note that there are no current-year tax benefits to contributing to a ROTH 401(k) or IRA. Still, the long-term benefits outlined in the previous section can be substantial and are worth considering as part of your overall retirement savings strategy.

Maximum contributions for 2023

If you want to maximize your retirement accounts this year, you might be planning to save as much as possible by contributing large amounts to your ROTH 401(k) and ROTH IRA accounts. However, ROTH 401(k) and IRA contributions are capped by the IRS to prevent employees with higher pay rates from enjoying disproportionate tax savings.

Even if you’re only planning to make modest after-tax contributions to a ROTH 401(k) or IRA, you need to understand the contribution limits for 2023. Contribution limits for ROTH 401(k)s aren’t determined based on your total income, but contributions to ROTH IRAs may be. 

Maximum contribution for a ROTH 401(k) in 2023

For ROTH 401(k)s, the 2023 maximum contribution is $22,500. If you’re over the age of 50, you may also contribute an additional $7,500 catch-up contribution in an effort to reach your retirement savings goals more quickly. 

Maximum contribution for a ROTH IRA in 2023

For ROTH IRAs, the 2023 maximum contribution is $6,500 with a $1,000 catch-up contribution available if you’re over age 50. 

Withdrawing funds from a ROTH 401(k) or IRA

Whether you’re ready for retirement or you want to put your money toward a particularly large expense, you’ll eventually need to withdraw the funds in your ROTH 401(k) or IRA. To maximize your money, timing is everything—as is understanding the individual rules for each type of account.

Withdrawals from a ROTH IRA are penalty-free (and tax-free) after a five-year holding period and after you reach age 59½. If you withdraw before that age, there are no penalties on withdrawals of contributions. However, your earnings from the withdrawal will be subject to federal income tax and a 10% penalty.

Similarly, if you take a hardship distribution from your ROTH 401(k), income tax and a 10% penalty will be applied. However, you may be able to avoid the 10% penalty if the hardship distribution meets one of the exemptions, so be sure to check with your accountant before moving any money. 

Questions? We’re here to help. 

After-tax contributions to a ROTH 401(k) or IRA offer several important benefits to support the growth of your retirement savings, but you might find that navigating the contribution limits, tax implications, and other factors is easier with advice from a professional.

We can evaluate the possible effects any financial decisions may have on your retirement savings, and assist in ensuring that you’re following the guidelines associated with your retirement savings account. Contact us today. 

what-you-need-to-know-about-retirement-plan-early-withdrawals

What You Need to Know About Retirement Plan Early Withdrawals
What You Need to Know About Retirement Plan Early Withdrawals 1600 941 smolinlupinco

Retirement plan distributions are typically subject to income tax. If you take an early withdrawal, they may be subject to additional tax penalties. But what defines “early?” 

Generally, it’s when withdrawals are taken out of a traditional IRA or another qualified retirement plan before the plan participant reaches the age of 59½.  These distributions are often taxable and may also be subject to a 10% penalty tax (or 25% if taken from a SIMPLE IRA during the first two years of plan participation). 

While there are ways to avoid that penalty tax (but not standard income tax), the rules can be complicated—which one taxpayer had to learn the hard way. 

Exceptions to early withdrawal penalty tax

Some exceptions to the 10% early withdrawal penalty are only available to taxpayers who take early distributions from traditional IRAs. Other exceptions only apply to qualified retirement plans, such as 401(k)s. 

Exceptions include (but are not limited to): 

  • Medical cost payments exceeding 7.5% of your adjusted gross income
  • Annuity-like withdrawals made under IRS guidelines
  • Withdrawals made from an IRA, SEP, or SIMPLE plan up to the qualified amount of higher education expenses for you or a family member 
  • Withdrawals made by qualified first-time homebuyers of up to $10,000 from an IRA, SEP, or SIMPLE plan

Another exception is the total and permanent disability of the IRA owner or retirement plan participant.  

New court case results in tax penalty

In one court case (TC Memo 2023-9), a taxpayer took a $19,365 retirement plan distribution before reaching the age of 59½ after losing his job as a software developer. Per the U.S. Tax Court, he had a diabetes diagnosis which he treated with insulin shots and other medications.

The taxpayer filed a tax return for the year of the retirement plan withdrawal but did not report the amount as income due to his medical condition. However, the plan administrator reported the amount as an early distribution with no known exception on Form 1099-R, which was sent to the IRS and the taxpayer. 

According to the court’s ruling, the taxpayer did not qualify for an exception due to the disability.  They noted that an individual is considered disabled if they are “unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or to be of long-continued and indefinite duration” at the time of the withdrawal.

Because the taxpayer, in this case, had been able to work up to the year at issue despite the diabetes diagnosis, the $4,899 federal income tax deficiency was upheld. 

Lesson learned: work with a knowledgeable tax professional

As the taxpayer in this case learned, guidance is important when taking early retirement plan distributions. If you’re unsure whether you’re eligible for an exception to the 10% early withdrawal penalty tax, our CPAs can help.

Contact us to consult with a professional today. 

5-tax-saving-ways-to-pay-for-your-childs-college-education

5 Tax-Saving Ways to Pay for Your Child’s College Education
5 Tax-Saving Ways to Pay for Your Child’s College Education 1600 942 smolinlupinco

Do you have a child or grandchild currently attending college? Congratulations! 

To help cover the costs of post-secondary education, you may have saved up over the course of several years in a tax-favored account, such as a 529 plan. Once your child is enrolled in college, though, you may be able to claim a number of tax breaks. 

For example: 

1. Tuition tax credits

The American Opportunity Tax Credit (AOTC) can be taken up to $2,500 per student for the first four years of college. This includes a 100% credit for the first $2,000 and a 25% credit for the second $2,000 in tuition, fees, and books. This credit is 40% refundable up to $1,000, which means you can get a refund if the credit amount is higher than your tax liability. 

You can also take the Lifetime Learning Credit (LLC) of up to $2,000 per family for each additional year of post-secondary education, which includes a 20% credit for up to $10,000 in tuition and fees. 

That said, only one education tax credit can be claimed per eligible student per year. To claim the credit, the taxpayer must receive a Form 1098-T statement from the school. 

Note that both credits will be phased out for those with certain modified adjusted gross income (MAGI): 

  • Between $160,000 and $180,000 for married couples filing jointly
  • Between $80,000 and $90,000 for singles

2. Scholarships

If certain conditions are met, scholarships can be exempt from income tax. One of these conditions is that the scholarship cannot be compensation for services and must instead be used for tuition, fees, books, and supplies—not for room and board.

Remember that a tax-free scholarship will reduce the expenses considered when computing the AOTC and LLC. As a result, those credits may be reduced or eliminated. 

3. Employer assistance

If your child’s college expenses are covered by your employer, that payment is considered a fringe benefit and is taxable to you as compensation. 

If it’s part of a scholarship program outside of the pattern of employment, however, it will be treated as a scholarship—assuming the scholarship requirements are met. 

4. Tax-exempt gifts

When someone gifts you money to cover your child’s college expenses, that person is generally subject to gift tax. For 2023, the gift tax exclusion threshold is $17,000 per recipient; married donors who give combined gifts may exclude gifts of up to $34,000. 

However, if someone—such as a grandparent—submits your child’s tuition payments directly to the educational institution, there is an unlimited gift tax exclusion. This applies only to direct tuition costs (as opposed to room and board, books, supplies, and more). 

5. Retirement account withdrawals

You can withdraw money from your IRA or Roth IRA account at any time without incurring the 10% early withdrawal penalty, as long as those withdrawals are used to pay for college costs. Note, however, that the distributions are subject to tax under the usual rules. 

You may also have the option to withdraw from or borrow against your employer retirement plan—but before doing so, ensure you fully understand any and all tax implications, including any potential penalties. 

Plan ahead with Smolin

Not all of the above-mentioned tax breaks can be used in the same year, and some may also impact qualification amounts for other tax breaks. 

Not sure which option is best for your situation? Our CPAs can help. Contact us if you would like to discuss any of these options, or other alternatives that may apply to your situation. 

secure-2-0-helps-you-save-for-retirement

SECURE 2.0 Helps You Save for Retirement
SECURE 2.0 Helps You Save for Retirement 1488 875 smolinlupinco

Built on the original SECURE Act of 2019, the Setting Every Community Up for Retirement Enhancement 2.0 Act (SECURE 2.0) was signed into law on December 29, 2022. 

The SECURE Act of 2019 made major changes to retirement provisions, including the required minimum distribution (RMB) rules. Here are some additional changes you should be aware of with SECURE 2.0. 

Increased age for beginning RMDs 

Employer-sponsored qualified retirement plans, traditional IRAs, and individual retirement annuities are all subject to RMB rules, which require that distribution begins by a specified start date. 

Under the SECURE 2.0 law, as of January 1, 2023, the start date will increase from age 72 to age 73. On January 1, 2033, this will increase to age 75. 

Higher “catch-up” contributions

Currently, participants in certain retirement plans are able to make additional catch-up contributions once they reach age 50 or older, with a limit on catch-up contributions to 401(k) plans of $7,500 for 2023. 

With SECURE 2.0, this limit is increased for individuals between the ages of 60 and 63 to $10,000 or 150% of the regular catch-up amount, whichever is greater. The provision will be effective for taxable years beginning January 1, 2025 (along with increased catch-up amounts for SIMPLE plans). 

After 2025, the increased amounts will be indexed for inflation.

Allowance of tax-free rollovers

With SECURE 2.0, beneficiaries of 529 college savings accounts will be permitted to make direct trustee-to-trustee rollover contributions from a 529 account to a Roth IRA in their names, without tax or penalty. 

This provision is effective for distributions after December 31, 2023, and several rules still apply. 

“Matching” contributions for employees with student loan debt

SECURE 2.0 will allow employers to make matching contributions to 401(k) and certain other retirement plans for qualified student loan payments. As a result, employees who are repaying student loan debt and cannot afford to save for retirement can still receive matching contributions from employers in their retirement plans. 

This will be effective beginning January 1, 2024. 

Changes to ABLE accounts

There are also changes to non-retirement plan provisions, including a change to tax-exempt Achieving a Better Life Experience (ABLE) accounts, which are designed to assist individuals with disabilities. 

Currently, ABLE account beneficiaries must have experienced a disability or blindness before age 26. With SECURE 2.0. This age limit is increased to 46, making more people eligible for ABLE account benefits. 

This is effective for tax years beginning after December 31, 2025. 

Questions? Contact us

These are only some of the many changes brought about by SECURE 2.0. If you have any questions about how the new law will affect you, contact us.

save-for-your-childrens-college-education-the-tax-wise-way

Save for Your Children’s College Education the Tax-Wise Way
Save for Your Children’s College Education the Tax-Wise Way 1600 941 smolinlupinco

If you have children, you’ve likely got college savings on your mind. Here are some tax-favored ways to save for future education costs so that you can take advantage of your options. 

Savings bonds

When used to finance college expenses, Series EE U.S. savings bonds offer two tax-saving benefits: 

  1. Until the bonds are cashed in, you don’t have to report interest on them for federal tax purposes. 
  2. If the bond proceeds are put toward qualified college expenses, interest on qualified Series EE and Series I bonds may be exempt from federal tax. 

To qualify for the college tax exemption, bonds must be purchased in your name or jointly with your spouse—not in your child’s name. Additionally, proceeds must be used for education-related expenses only (i.e., tuition and fees but not room and board). If only some of the proceeds are used for qualified expenses, then only some interest will be exempt. 

Note that if your modified adjusted gross income (MAGI) exceeds certain thresholds, the exemption will be phased out. For example, the exemption for bonds cashed in 2023 begins to phase out when MAGI hits $137,800 for married joint filers (or $91,850 for other returns). The exemption is completely phased out when MAGI is at or above $167,800 (or $106,850 for others).

529 plans

Qualified tuition programs, or 529 plans, are established by state governments or private institutions. These programs allow you to purchase tuition credits or contribute to an account specifically designed for your child’s future education costs. 

These contributions are not deductible and are calculated as taxable gifts to the child. They are, however, eligible for the 2023 annual gift tax exclusion of $17,000. Donors who contribute more than the annual exclusion limit for the year may treat the gift as if it were given in increments throughout a five-year period. 

Until college costs are paid from the funds, earnings on these contributions accumulate tax-free. Distributions from 529 plans are also tax-free to the extent that the funds are used to pay for qualified higher education expenses, including up to $10,000 in tuition costs for elementary or secondary school. 

Distributions of earnings not used for qualified higher education expenses will generally be subject to income tax in addition to a 10% penalty. 

ESAs 

For each child under the age of 18, you can establish a Coverdell education savings account (ESA) and make contributions of $2,000. Note that this age limit does not apply to beneficiaries who have special needs. 

Once AGI is above $190,000 on a joint return ($95,000 for others), the right to make contributions will begin to phase out. If the income limit becomes an issue, the child can then contribute to their own account. 

Despite contributions not being deductible, income in the account is not taxed and distributions are tax-free when put toward qualified education expenses. If the child does not pursue higher education, the money must be withdrawn when they turn 30, and any earnings will be subject to tax plus penalty. However, those unused funds can be transferred to another family member’s ESA if they have not yet reached age 30. (This age requirement does not apply to those with special needs.)  

Talk to a financial advisor today

This is not an exhaustive list of all the tax-wise ways to save for your children’s college education. If you would like to discuss these options or learn about others available, contact us to speak with a certified CPA. 

getting-the-most-out-of-your-401k-plan

Getting the Most Out of Your 401(k) Plan
Getting the Most Out of Your 401(k) Plan 1594 938 smolinlupinco

The best way to reduce taxes and set yourself up for a comfortable retirement? Putting money toward a tax-advantaged retirement plan. If you’re not already making the most of an employer-offered 401(k) or Roth 401(k), now is the time to start. The sooner you start contributing to your retirement plan, the more substantial your nest egg will be. 

Looking to build up that nest egg even more? Consider increasing your contribution (if you’re not already contributing the maximum amount allowed). Thanks to tax-deferred compounding—or, in the case of Roth accounts, tax-free—boosting contributions can significantly impact the amount of money you’ll have once you retire. 

Retirement plan contributions in 2023

With a 401(k), an employee can elect to have a certain payment amount deferred and then contributed to their plan by an employer on their behalf. Due to inflation, these amounts are unsurprisingly increasing—the contribution limit in 2023 will be $22,500, compared to $20,500 in 2022. 

Employees who will be 50 years of age or older by the end of the year will also be able to make additional “catch-up” contributions of $7,500 in 2023 (compared to $6,500 in 2022). As a result, these employees can save a total of $30,000 in 2023 (compared to $27,000 in 2022). 

401(k) contributions

There are many benefits to contributing to a traditional 401(k). For example: 

  • Contributions are pre-tax, which reduces your modified adjusted gross income (MAGI), and can also help to reduce or avoid the 3.8% net investment income tax.
  • Plan assets can grow tax-deferred, which means you don’t have to pay any income tax until you take distributions.
  • All or some of your contributions can be matched by your employer pre-tax. 

If you’re already contributing to a 401(k) plan, you may want to take a closer look at your contributions for 2023, aiming to increase your contribution rate to get as close to the $22,500 limit as possible—with an extra $7,500 for those aged 50 or older. 

Note that your paycheck will be reduced by the amount of contribution only, as these are pre-tax and income tax is not withheld. 

Roth 401(k) contributions

High-income earners may benefit from Roth 401(k) contributions, as they don’t have Roth IRA contributions as an option. This is because if your adjusted gross income exceeds a certain threshold, your ability to contribute to a Roth IRA is reduced or eliminated. 

If your employer offers a Roth option in their 401(k) plans, you can designate some or all of your contributions as Roth contributions. While these contributions won’t reduce your MAGI, qualified distributions will be tax-free. 

Plan your financial future with Smolin

If you’re not sure how much to contribute, or how to determine the best combination of traditional and Roth 401(k) contributions, our knowledgeable tax advisors can help. 

Contact us to get the most out of your 401(k) plan or to discuss other tax and retirement-saving strategies.

iras-and-rmds-answering-your-faqs

IRAs and RMDs: Answering Your FAQs
IRAs and RMDs: Answering Your FAQs 1600 941 smolinlupinco

You may be aware of the fact that you can’t let funds sit in your traditional IRA indefinitely. Once you reach age 72, you’re required to start taking withdrawals. 

You may also be aware that the rules for taking required minimum distributions, or RMDs, are complex. Here are some answers to frequently asked questions about taking withdrawals from a traditional IRA (including SIMPLE IRA or SEP IRA). 

Can I withdraw money before retirement?

The simple answer: yes. 

That said, if you want to take money out of a traditional IRA before the age of 59.5, those distributions are taxable and you may be subject to a 10% penalty tax. 

That 10% penalty tax—but not regular income tax—can be avoided if you pay: 

  • Qualified higher education expenses
  • Up to $10,000 of expenses if you’re a first-time homebuyer
  • Health insurance premiums if you’re unemployed 

When can I take my first RMD for an IRA?

You must take your first RMD by April 1 of the year after the year in which you turn 72. Note that this rule applies whether or not you’re still employed. 

How do I determine my RMD? 

When calculating your RMD, take the account balance from the end of the preceding calendar year and divide it by the distribution period from the IRS’s Uniform Lifetime Table. 

If the sole beneficiary is a spouse who is 10 or more years younger than the owner, a separate table will be used. 

What if I have multiple accounts? 

For those with more than one IRA, the RMD for each must be calculated separately each year. 

However, you don’t have to take a separate RMD from each IRA—you may combine the RMD amounts for all IRAs, and either withdraw the total from one IRA or a portion from each. 

Can I withdraw amounts exceeding my RMD? 

Yes—you can always withdraw more than your RMD. Note, however, that you cannot put excess withdrawals toward RMDs in future years. 

When planning for RMDs, weigh your income needs against the ability to maintain the IRA tax shelter for as long as possible. 

Can I withdraw more than once a year? 

Yes. As long as you withdraw the total annual minimum amount by December 31 (or, if it’s your first RMD, April 1), you may withdraw your yearly RMD in any number of distributions throughout the year.

What if I don’t take an RMD? 

If your distributions for any given year are less than your RMD, you’ll be subject to an additional tax. This tax is equal to 50% of the amount that was not paid out but should have been. 

Plan ahead with us

Questions about your retirement planning? Our knowledgeable tax advisors can help. Contact us to learn more. 

Thanks to Inflation, You Can Save More for Retirement in 2023
Thanks to Inflation, You Can Save More for Retirement in 2023 1600 941 smolinlupinco

Do you know how much you and your employees can contribute to your retirement plans next year? In Notice 2022-55, the IRS recently announced cost-of-living adjustments that apply to the monetary limitations for pensions and other qualified retirement plans for 2023. 

Because of inflation, these amounts have increased more in comparison to recent years. 

401(k) plans

In 2023, the contribution limit for employees who participate in 401(k) plans—along with 403(b) plans, most 457 plans, and the Thrift Savings Plan—will increase from $20,500 to $22,500. 

For employees over the age of 50 who participate in the above-mentioned plans, the catch-up contribution limit will increase from $6,500 to $7,500. As a result, these individuals can contribute up to $30,000 in 2023. 

SEP and defined contribution plans

In 2023, the contribution limit for defined contribution plans, including Simplified Employee Pension (SEP) plans, will increase from $61,000 to $66,000. 

To participate in a SEP, eligible employees must receive at least $750 (increased from $650 in 2022) for the year. 

SIMPLE plans

In 2023, SIMPLE plan deferrals will increase from $14,000 to $15,500. For employees over the age of 50 who participate in SIMPLE plans, the catch-up contribution limit will increase from $3,000 to $3,500. 

IRA contributions

In 2023, the limit on annual individual IRA contributions will increase from $6,000 to $6,500. The IRA catch-up contribution limit for those over the age of 50 is not subject to a cost-of-living adjustment and will remain the same as in 2022: $1,000. 

Additional plan changes

The IRS also announced the following changes for 2023: 

  • The annual benefit limitation under a defined benefit plan will increase from $245,000 to $265,000. Limitations for those who separated from service prior to January 1, 2023, will be calculated by multiplying their compensation limit (as adjusted through 2022) by 1.0833.
  • Limitations concerning the definition of “key employee” in a top-heavy plan will increase from $200,00 to $215,000.
  • For determining the maximum account balance in an employee stock ownership plan subject to a five-year distribution period, the dollar amount will increase from $1,230,000 to $1,330,000. For determining the lengthening of the five-year distribution plan, the dollar amount will increase from $245,000 to $265,000.
  • The limitation for “highly compensated employees” will increase from $135,000 to $150,000. 

Plan ahead with our financial advisors

Because contribution amounts will be significantly higher in 2023 than in previous years, you and your employees will be able to save more in your retirement plans. 

If you have questions about your tax-advantaged retirement plan, or if you’re interested in exploring other retirement plan options, please contact our experienced tax services team. 

how-owning-a-family-business-complicates-estate-and-business-succession-planning

How Owning a Family Business Complicates Estate and Business Succession Planning
How Owning a Family Business Complicates Estate and Business Succession Planning 1600 941 smolinlupinco

For small business owners, planning their estates and their companies’ succession often overlap. If your venture is family owned and operated, a significant portion of your assets is invested in your business. 

Comprehensive estate planning is essential to ensure your organization continues after your passing. Failing to take the proper steps in preparing your company for this eventuality could mean additional financial and legal risks to sort out later.  

Management succession for separate ownership 

One of the challenging aspects of transferring your family business is distinguishing between a succession of ownership and management. Compared to third-party business sales, where ownership and management succession coincides, family-run companies may need to approach these processes separately. 

When considered through the lens of estate planning, it may be wiser to transfer your assets to the next generation sooner. This can further minimize any estate tax liability for your family and business because you’ve reduced future appreciation. Of course, you may not be willing to change leadership just yet if they aren’t ready for the responsibility. 

Fortunately, there are several approaches you might consider that can enable you to transfer ownership of your family business while still retaining control: 

  • Consider using a family limited partnership, trust, or another ownership alternative to transfer most of the ownership interests to your future stakeholders without giving up managerial control 
  • Use nonvoting stock to transfer ownership
  • Create a stock ownership plan for your employees

Separating ownership and succession planning would be beneficial if you have family members who aren’t part of your business. You can still share the wealth of your company’s earnings by giving your beneficiaries nonvoting stock or forms of equity interests that don’t give them any control over managing your business. This effectively prioritizes the rights of those who work for your organization. 

Resolving disputes

When planning your business succession, you may run into conflicts regarding the financial needs of the older and younger generations involved. This doesn’t have to end in a tragic family rift since there are methods to create cash flow for owners while minimizing the burden on future company leadership and employees.  

Suppose you plan to sell your business to your beneficiaries through an installment sale. This creates liquidity and eases the financial burden placed on your children or other heirs. It’s also possible that these generated cash flows can fund the purchase. You should be able to avoid gift and estate tax liabilities so long as transactions are much like arm’s-length transactions between parties who aren’t related. 

Start sooner than later

No matter what strategy you choose, planning works best when you begin early. By taking the time to transition your family business over several years or more, you get more time to share your succession philosophy and educate your family about it. 

Additionally, this makes it possible to give up control over time and create a business structure and process that are tax savvy. Contact our offices today to learn more about succession strategies that will support the unique goals you have for your family business. 

© 2022

is-the-time-right-for-a-roth-conversion

Is the Time Right for a Roth Conversion?
Is the Time Right for a Roth Conversion? 1600 941 smolinlupinco

A downturn in the stock market may cause the value of your retirement account to decrease. However, if you have a traditional IRA, this decline may provide a valuable opportunity: It may allow you to convert your traditional IRA to a Roth IRA at a lower tax cost.

Roth vs. traditional IRAs

Roth IRAs differ from traditional IRAs in a few key ways: 

Roth IRA

Contributions to Roth IRAs are never deductible. However, withdrawals and their earnings are nontaxable if you’re over 59 ½ years of age and your account is at least five years old. Additionally, contribution withdrawals are always allowable and are tax and penalty-free. RMDs are also not mandatory until you reach age 72.

There are, however, contribution limitations to a Roth IRA based on your modified adjusted gross income (MAGI). You can always convert your traditional option to a ROTH so long as you pay any income tax owed. 

Traditional IRA

Traditional IRA contributions may be deductible based on your MAGI and if you or a spouse participate in a qualified retirement plan, like a 401(k). The funds in this account can grow tax-deferred. 

One disadvantage to this is that withdrawals are usually taxed as income. If you make any withdrawals before the age of 59 ½, there are also penalties that may be imposed, unless you qualify for certain exceptions. You still have a required minimum distribution requirement starting after age 72.

Reducing your tax bill

When the stock market takes a downturn, you may see a benefit. For example, suppose your traditional IRA loses some of its value. You could save on your taxes by converting to a Roth sooner than later. You’ll also sidestep appreciative taxes when the market rebounds. 

Before you decide to convert, take the following considerations into account: 

Do you have enough funds to cover the tax bill? Those without much cash on hand for conversion taxation costs may need to withdraw this expense from their retirement savings, which is detrimental to your goals. Remember, tax brackets increase according to how much money you convert, which means a hefty tax obligation later. 

What retirement plans do you have? Whether you should convert or not might hinge on what stage in life you’re at. If you’re close to retiring, going from a traditional to Roth IRA option doesn’t make sense since you’ll draw on those accounts immediately. Typically, you choose a conversion if you still have time for funding growth and to let them compound over time.

Converting from a traditional IRA to a Roth doesn’t require you to commit all your money at once. This is a flexible process where you can use whatever percentage you wish, allowing you to slowly change over and take years to absorb the tax hit instead. 

Keep in mind that before going through with a Roth IRA conversion, there are additional steps and considerations to account for. If you think converting to a Roth is ideal for your financial goals, reach out today to learn more.  

© 2022

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