A Tax Strategy You May Not Know

Talking taxes on a Friday is a lot easier than talking taxes on a Monday (thank you for reading in Winter Haven, FL)! And believe it or not, at this time of year it is good to be talking taxes no matter what. Preparation and planning are the name of the game. *

Here’s some “good” news when it comes to taxes and tax strategies: the Roth IRA, Roth IRA conversion and Roth 401k are alive and well. The “good” part is that for nearly ALL of you reading this, you ARE eligible for both the Roth IRA conversion and the Roth 401k (if your company offers a Roth 401k) even if you are in the higher/highest income brackets or own a business! And these strategies can be employed NOW for 2019.

These Roth strategies can make a BIG difference today – and more important in the longer-term – for taxpayers of all ages and incomes. How?

Roth 401k – Not the same as Roth IRA

The popular misconception is that the Roth 401k is not available to high income earners. The correct information is that there is NO income limit to be eligible for the Roth 401k (if a Roth 401k is available from your company). If you make $30,000 annually, $300,000 or $3 million you are still eligible for the Roth 401k. The difference is that Traditional 401k salary deferrals (meaning contributions) are PRE-tax and Roth 401k salary deferrals are AFTER-tax.

Now you may ask, “Why would I want to give up my tax deduction by using the Roth 401k?” The reason is that – especially if you max out – you will likely have A LOT of monies saved someday in your (pre-tax) 401k. And if you have changed jobs a few times and have “Rollover IRAs” then those (pre-tax) monies have and will continue to accumulate. AND YOU WILL BE FORCED TO PAY TAXES LATER ON THE REQUIRED MINIMUM DISTRIBUTIONS (RMD’s).

On the other hand, when you use the Roth 401k – and make after-tax contributions today – you can roll those monies over to a Roth IRA later and HAVE NO RMD’s AND IF YOU DO USE THOSE MONIES, THEY ARE TAX-FREE.

A strategy to partly preserve a reduction of your taxable income is to contribute partly to the Traditional 401k (and get the tax break today) and partly to the Roth 401k (and get the tax-free advantage later). Ask me about this.

Roth IRA Conversion

There is currently no income limit on doing what is called a Roth IRA Conversion. In this case, you “convert” monies from your Traditional IRA or Rollover IRAs (both of which contain pre-tax monies) to Roth IRA monies. You pay ordinary income taxes on the converted monies, but you now have precious tax-free Roth IRA monies that can continue to grow tax free and have NO RMD’s. According to my reading on the topic, the reason that 2019 could be a good year to do the conversion is that the lower tax brackets of 22% and 24% (especially for newly retired people) are broad enough to encompass income between $39,000 and $160,000 for Single taxpayers and between $79,000 and $321,000 for joint taxpayers. The brackets are set to increase slightly in 2020 to account for inflation. An important point is that this strategy is for those who believe their tax rates in retirement will be the same or higher than today (a somewhat safe bet).*

Roth IRA

The Roth IRA is still available only to those making less than $122,000 for Single taxpayers and less than $193,000 for joint tax payers. IF YOU ARE MAKING UNDER THOSE AMOUNTS, DEFINITELY CONSIDER THE ROTH IRA! The tax-free growth feature of the monies in the Roth IRA will help you in the long-run. Ask me about the 5-year Roth IRA rule for an extra advantage.

I tried to make it worthwhile – even enjoyable – for you to read about taxes. Please let me know. I love hearing from my readers!

* CONSULT WITH YOUR TAX ADVISOR FOR ALL TAX ADVICE.