Most Americans understand the importance of saving for retirement, however many of them are not aware of the tax implications that go along with investing in a traditional or Roth IRA. There are pros and cons to each but given the current state of our economy only one type of account seems viable for the millions of baby boomers getting ready for retirement.
During the 1970s and 1980s when the baby boomers began saving for retirement, tax rates were almost double what they are today. Financial professionals in the past likely advised their clients to take advantage of a tax deferred strategy because tax rates were almost certain to go down. They were right. Luckily for that generation tax rates did decline and they were able to accumulate more money with their traditional IRAs while deferring the tax to a later time. However, this opportunity no longer exists in today’s economy.
My previous article titled “Our National Debt Crisis” highlights the reasons why we should no longer expect tax rates to drop in the future. Tax rates are at all-time lows and now is the time for you to insulate yourself from the possibility of rising tax rates and protect the wealth that you have accumulated.
Converting your traditional IRA into a Roth will allow you to take tax-free distributions in retirement that could save you millions over the course of your life, simply by paying the tax at these historically low rates. Acting now is more important than ever considering tax rates are guaranteed to go up in 2026 even if Congress does nothing. According to a study by LIMRA Secure Retirement Institute in 2019, just 19 percent of the Americans that own an individual retirement account are contributing to a Roth. There are a few key advantages to a Roth IRA that people should consider when thinking about the possibility of doing a conversion.
Traditional IRAs force you to take RMDs or required minimum distributions every year after reaching age 72. With a Roth you can withdraw money at any time, for any reason, tax-free. Another benefit to a Roth is the tax-free transfer of wealth to beneficiaries. When you pass away it is likely that your heirs are in their prime earning years, and if they are forced to take on additional income from the required minimum distributions the legacy you leave will be substantially less than you anticipated.
The largest disadvantage of converting to a Roth IRA is the tax bill that you receive for the transfers. However, we have developed strategies that can help reduce or even eliminate the tax on your conversions. Adding a certain type of life insurance policy to your portfolio will give you the flexibility you need to afford the conversions and begin to benefit from tax-free distributions in retirement. As I mentioned earlier, tax rates are at all-time lows and scheduled to increase in 2026 with the possibility of rising again further down the road. Acting now will give you reassurance knowing that your money will last through retirement and provide you with many other opportunities along the way. Baby boomers with the majority of their wealth in traditional IRAs will have the future of their retirement in the hands of the government if they do not act soon.
Roth conversions are a simple tool but not easy to implement. Navigating the conversions and attempting to pay the tax with other IRAs funded with pre-tax dollars can be confusing. Therefore, it is best to consult a financial professional about your specific situation. They can come up with strategies that will hedge against a rising tax rate environment and allow you to enjoy a tax-free retirement.
If you have any questions about Roth conversions please contact me at firstname.lastname@example.org or The AFI Group directly.
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