Estimated read time: 8-9 minutes
Significant tax savings are set to expire at the end of 2025. But if you make one important move with your IRA or 401K now, you could lock in the lowest tax rates in 40+ years – and save yourself tens of thousands - if not hundreds of thousands of dollars in taxes in retirement.
You've probably heard about this move – a Roth conversion – but maybe you don't know how much money it could save you in taxes if you act now.
Understanding the current tax situation
First it's important to understand that current tax rates are at historic lows, thanks to the Tax Cuts and Jobs Act (TCJA) of 2017.
At the same time, our national debt and deficit spending are at or near historic highs.
The question is, what happens when the TCJA tax cuts automatically expire at the end of 2025? If Congress doesn't do anything, tax rates automatically go up.
Ask yourself, with today's reckless government spending, where do you think taxes have to go in the next 5-10 years? Congress may have no choice.
The impact of higher taxes on retirement savings
So how would higher future taxes impact your retirement savings? It's bad news. If a big chunk of your retirement savings is in a traditional IRA or 401K, that means you've deferred taxes – you haven't paid taxes on it yet.
But make no mistake about it. You will have to pay taxes when you withdraw money in retirement.
A tax-deferred IRA or 401K is effectively a joint account with Uncle Sam. As soon as you start withdrawing money from that account, it will be treated as ordinary income by the IRS. And you'll pay taxes at current tax rates.
If tax rates go up as anticipated, more of your retirement savings will have to go to the IRS, which leaves you with less money in retirement.
Benefits of Roth IRA/401K conversion
So how does a Roth conversion play into this?
Simple. A Roth conversion moves your money from tax-deferred to tax-free. Yes, you pay taxes on the money once, as you convert it – at the current tax rates as of the conversion. (This money can come out of the IRA or 401K account, or from other cash or savings if available.)
But then you don't have to pay taxes on that money in the future. In fact, you don't even pay taxes on the future growth of the money, once it's in a Roth. This can lead to even bigger tax savings, if it is compounded over 20 or 30 years of retirement.
This is why a Roth conversion can be so attractive. Because it can help protect you from tax increases on the current value of your retirement account. Plus it could exempt you from taxes on all the future growth of that money.
Not only that, it gives you much more freedom over how and when you spend that money in retirement. Yes, there are certain rules regarding withdrawals from a Roth IRA, especially after conversion. You'll want to be at least 59 ½ and keep the money in the account for at least 5 years to avoid all taxes and penalties. But then the Roth money and all future growth is 100% yours to spend or save as you please, with no taxes or Required Minimum Distributions.
One more benefit – a Roth conversion can lower your taxable income in retirement, potentially helping you avoid taxes you may otherwise have to pay on up to 85% of your Social Security benefits.
Ideal candidates for Roth Conversion
So how do you know if a Roth conversion is right for you?
This decision can be complex, and should be made in the context of your current and future tax situation. Typically this goes beyond what a CPA or tax accountant will help you decide, because they focus on filing your taxes every April.
It's important to look at your current and expected future income, your savings, your expected Social Security benefits, and more.
As a general rule, you can start to see significant tax savings if you've saved at least $200,000 and up to several million dollars for retirement.
A skilled retirement planner or fiduciary financial advisor can help you calculate your future tax obligations on your retirement accounts. As well as how much you could save by converting to a Roth account.
Not only that, this skilled advisor can help you navigate the Roth conversion, to prevent you from making any mistakes that could lead to unexpectedly large tax bills or penalties.
Timing is crucial
If this is something that you think might make sense, it is important to act soon.
A Roth conversion can be spread out over multiple tax years, which can lower your effective tax rate and tax bracket for the money converted. Even just splitting this conversion over two tax years could cut in half the income counted for each year – which could help many folks avoid hitting the highest tax brackets.
Remember, your marginal tax bracket is determined based on the amount of the conversion and your income in each tax year. The difference between paying 24% and 37% on your conversion can add up to significant tax savings.
Because the current tax cuts expire at the end of 2025, you only have until the end of this year to start this process.
Potential costs and considerations
Perhaps the biggest hurdle to doing a Roth conversion today is the fact that you do have to pay taxes on that money now.
But remember, you will pay taxes on this money eventually. The Roth conversion simply allows you to lock in today's low tax rates, and potentially pay a lot less in lifetime taxes. Plus you can manage your tax obligations by spreading the conversion out over the next two tax years.
And remember, you have options for where the taxes owed come from. You can work with your financial advisor to pay the taxes owed out of cash or other savings, to keep as much money as possible in the tax-free Roth account after conversion. Or you can pay the taxes out of the account balance, if that works best for you. Either way can result in significant long-term tax savings.
Personalized analysis and expert guidance
It helps to get expert guidance on your Roth conversion, to avoid any costly mistakes, unexpected tax bills, or expensive penalties. But first, you have to decide if a Roth conversion is even right for you.
B.O.S.S. Retirement Solutions has helped thousands of Utah families plan and prepare for retirement, including navigating the Roth conversion process – it's a core part of their Retirement Tax-Savings Analysis process.
B.O.S.S. Retirement Solutions offers a free, customized Retirement Tax-Savings Analysis that shows you exactly how much money you could save.
During this quick appointment, a B.O.S.S. fiduciary financial advisor will gather some basic information from you. Then they determine the tax planning strategies that are best-suited for your specific situation. Next, they'll sit down and freely share these strategies with you, so you can see exactly how much money you could save.
While other financial advisors charge hundreds of dollars for similar services, B.O.S.S. Retirement Solutions offers this service for free, even if you're not a client.
This offering could be especially beneficial for families who have saved at least $200,000 up to several million dollars for retirement.
To schedule your free, no-obligation B.O.S.S. Retirement Tax-Savings Analysis, call (801) 990-5055, or request your free Retirement Tax-Savings Analysis online here.
Tyson Thacker and Ryan Thacker are the CEO and president of B.O.S.S. Retirement Solutions. They are published authors of the book "The B.O.S.S. Retirement Blueprint" and they've helped thousands of area families plan for a better, more secure retirement. They are a five-time winner of Utah's Best of State Award and have six offices located throughout the Wasatch Front.
This is for illustrative purposes only, results may vary. Advisory services offered through B.O.S.S. Retirement Advisors, an SEC Registered Investment Advisory firm. Insurance products and services offered through B.O.S.S. Retirement Solutions. The information contained in this material is given for informational purposes only, and no statement contained herein shall constitute tax, legal or investment advice. The information is not intended to be used as the sole basis for financial decisions, nor should it be construed as advice designed to meet the particular needs of an individual's situation. You should seek advice on legal and tax questions from an independent attorney or tax advisor. BOSS submitted applications and paid application fees to be considered for the Utah Best of State for Retirement Planning awards. The award results were independently determined by the awarding organization's criteria (https://www.bestofstate.org/about.html) and the information BOSS provided in the applications. BOSS received the Utah Best of State award in 2019, 2020, 2021, 2022, and 2023. Our firm is not affiliated with the U.S. government or any governmental agency. Marketing materials provided by Infinity Marketing Services.
