Utilizing Roth Conversions as Retirement Tools
Many people close to retirement are unaware of the many reasons why a ROTH Conversion can be a great retirement strategy. A good example of someone who successfully used a ROTH conversion as a retirement tool is Max Levchin, one of the Founders of Paypal, and later Yelp. He placed around 3.9 million shares of Yelp into his ROTH IRA. The share values have previously been higher, but recently it’s been trading at about $36 per share, meaning he has over $140 million in the ROTH alone. That isn’t just impressive because of the amount, but because a ROTH will allow it to continue to grow tax-deferred, and to later be accessed tax-free as well.
A lot of people are asking themselves “well why don’t we have ROTH’s too?”, and it absolutely is something everyone should at least consider-- but the process itself isn’t quite that simple. When it comes to choosing between a ROTH or Traditional IRA, there are a few things you should consider.
One of the biggest concerns is your tax bracket. With a ROTH IRA, you’re really contributing money that has already been taxed at the rate that all your income is taxed. One way of thinking about a ROTH is that you’re paying tax on the seed, rather than the harvest.
In the case of a Traditional IRA, your invested money goes in before tax, and the tax is taken out later – often much later – when you take minimum distributions. So, if you think your tax bracket will be lower after you retire, then a Traditional IRA is the best choice for you, since you’ll pay less tax on your distributions. But, if you think your taxes will be lower now, then this is the time to take advantage of that lower rate and use a ROTH IRA. A ROTH IRA also comes with a few other advantages.
You are required to take distributions at age 70 ½ with a Traditional IRA, but you’ll never have that requirement with a ROTH IRA. We witness this all the time – new clients who have been taking their RMDs because their advisors told them they had to, but not offering them alternative strategies. For those who have no need to take their RMDs, opening or converting a Traditional IRA to a ROTH may be a good strategy. ROTH IRA’s can also be left to beneficiaries and provide a benefit to them over their lifetimes, and they can be an important way to leave a legacy.
The new Trump tax law has brought some changes to ROTH conversions, however. For example, there as previously a type of “do-over” period you had in case something happened after the fact, or if you changed your mind. Unfortunately, that’s no longer the case. There are income limits to keep in mind as well, and so not everyone will qualify to open a ROTH or ROTH conversion. Alternatively, there is a “back-door” ROTH that you can make use of to help get around those limits.
As we always say, everyone’s financial situations are different, and it takes an experienced team to help you make these decisions. If you want to find out how we can help you save time, money, and worry, we offer a no-obligation financial consultation with one of our advisors. You can schedule your appointment today by calling us at 216-521-1711, or contacting us online here.
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Case studies are intended to illustrate the types of financial issues faced by actual clients. They should not be construed as a testimonial for or endorsement of Lineweaver Wealth Advisors. They do not represent the experience of any advisory client. Each client’s situation is different, and their goals may not always be achieved. Lineweaver Wealth Advisors, LLC, is not engaged in the practice of law or accounting. Tax information provided is general in nature and should not be construed as legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation. Tax rules and regulations are subject to change at any time.
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