News & Articles

Are Roth IRAs Still Beneficial under the New Tax Law?

Posted on Mon, Mar 12, 2018

The Roth IRA remains an attractive retirement planning vehicle for many individuals after the changes made by the Tax Cuts and Jobs Act (TCJA). Here's what you need to know about Roth IRAs and Roth IRA conversions under the new law.

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Tags: Roth IRA, Traditional IRA, Tax Rates, Roth IRA Conversion

ROTH IRAs: A Great Estate Planning Vehicle

Posted on Wed, Dec 06, 2017

Roth IRAs are a great tax saving vehicle. The reason: Investments held in a Roth IRA are allowed to build up federal-income-tax-free. Later on, you can take federal-income-tax-free withdrawals. Obviously, a zero tax rate is the best rate going.

Tax-Free Roth Withdrawals

There are only two requirements for tax-free withdrawals. You must:

1. Have a Roth account that's been open for more than five years.

2. Be age 59 1/2 or older.

In addition to being great tax saving tools for retirement, Roth IRAs also provide tremendous estate planning advantages -- especially if you can get a large portion of your wealth into an account.

Unfortunately, getting lots of money into a Roth IRA is not so easy. It can take many years of annual contributions. However, there's also one very quick way -- by converting an existing traditional IRA or SEP account into a Roth IRA. There are no limitations on the size or number of converted accounts. Naturally, under tax law, there is a price for allowing you to jump start your Roth IRA savings program with a conversion. Even so, it may be worth the price.

Roth Conversion Basics

A Roth conversion is treated as a taxable distribution from your traditional IRA. In other words, you're deemed to receive a taxable cash payout from your traditional IRA with the money going into the new Roth account. So the conversion triggers a current income tax bill. In most cases, however, this negative factor is outweighed by the following positive factors.

    • You don't have to pay the 10% premature withdrawal penalty tax on the deemed distribution that results from the Roth conversion transaction. This is true even if you're under age 59 1/2 when the conversion takes place.
    • Your conversion tax bill may be significantly lower, depending on the future fate of tax rates. Some people believe the tax rates we have today could be the lowest rates we'll see for the rest of our lives. No one knows, of course, but now could be a good time for a Roth conversion.
    • The value of the traditional IRA (or IRAs) you want to convert may still be down because of poor investment performance in recent years. However, a lower account balance means a lower conversion tax bill, which is a good thing.

Now for the Estate Planning Angle

The usual reason for converting a traditional IRA into a Roth account is to earn tax-free income that will be withdrawn after age 59 1/2 to help finance your retirement. But if you don't really need the money for retirement, there's another less-publicized advantage to converting. Let's say you would like to pass along as much wealth as possible to your heirs. If so, a Roth conversion transaction can be a great estate planning technique for you.

Don't misunderstand. Roth IRA balances are not exempt from the federal estate tax (nor are traditional IRA balances). However by paying the up-front Roth conversion tax bill, you effectively prepay your heir's future income tax bills while reducing your taxable estate at the same time. And this prepayment of income tax doesn't result in any gift tax or diminish your $5.60 million federal gift tax exemption for 2018 or any federal estate tax exemption (up from $5.49 million in 2017).

But there is even more to pass on to your heirs. A big advantage of Roth accounts is they are not subject to the required minimum distribution rules that apply to traditional IRAs. These rules force the account owner to begin liquidating his or her IRA after turning age 70 1/2. Of course, this means Uncle Sam and state tax collectors take their cut in the form of taxes on the distributions. When you don't need the IRA money, being forced to take these required minimum distributions and pay the resulting income taxes can be pretty costly.

But converting a traditional IRA into a Roth account stops required minimum distributions. Once a conversion is complete, you are free to leave the account balance untouched and accumulate as many tax-free dollars as possible to pass along to your heirs.

However, the required minimum distribution exemption ends when you die. At that point, the Roth IRA falls under a set of the required minimum distribution rules that apply to all inherited IRAs (traditional and Roth). If your heirs are disciplined enough to take only the annual required minimum distribution amounts from the inherited Roth IRA, the account liquidation process can be strung out for many years, as the following example illustrates.

What happened in this example? In effect, the husband and wife took advantage of the Roth IRA rules to establish a nice federal-income-tax-free annuity for their daughter.

For this planning technique to work as it does in the above example, you must take four steps:

Step 1 - Designate your spouse as the Roth IRA beneficiary before you die.
Step 2 - After your death, your spouse must treat the account as his or her own by re-titling it in his or her name.
Step 3 - Your spouse must also name your child as the new Roth IRA beneficiary.
Step 4 - Finally, your child must begin taking annual required minimum distributions by no later than December 31 of the year following the year of your spouse's death. Otherwise, your child will be required to liquidate the inherited Roth IRA after only five years, which would end the tax-free strategy prematurely.

As you can see, a Roth IRA can be a great estate planning vehicle. However, before implementing this strategy, get professional advice about the conversion tax consequences and the estate planning considerations.

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Tags: Roth IRA, Retirement, Estate Planning, Roth IRA Conversion

Ten Sources of Tax-Free Income

Posted on Mon, Nov 06, 2017

There are still ways to earn income that is free from federal income tax. With the various tax increases that have taken effect in recent years, tax-free income opportunities are more valuable than ever.

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Tags: Roth IRA, Gifts, Income, Tax-free Income, Life Insurance

Don't Overlook a ROTH IRA if You are Self-Employed

Posted on Mon, Dec 12, 2016

Saving for retirement on a tax-advantaged basis should be on nearly everyone's financial "to do" list. Making contributions to a Roth IRA is one tax-wise way to save, because you can take withdrawals after age 59 1/2 that are free from federal income tax, assuming you've had at least one Roth account open for more than five years. Of course, Roth contributions are nondeductible, but they are valuable because you reap tax savings on the back end of the deal.

However, if you're self-employed and fairly affluent, you may have dismissed the idea for two reasons:

1. You figure your income is too high to qualify for Roth contributions.

2. You figure a Roth IRA is not that attractive because you believe you're in a higher tax bracket now than you'll be in during retirement. Instead, you make maximum deductible contributions to a traditional tax deferred retirement arrangement such as a simplified employee pension (SEP) plan, solo 401(k), or a defined contribution or defined benefit Keogh plan.

In this article, we'll examine why both assumptions may be wrong and why a Roth IRA is a smart way to build a substantial federal-income-tax-free retirement fund -- even if you have another retirement plan.

Think Your Income Is Too High? You May Be Wrong

It's true that the ability to make Roth IRA contributions is phased out, or completely eliminated, if your modified adjusted gross income (MAGI) exceeds certain levels. For 2017, the phase-outs start at the amounts listed below. MAGI is the adjusted gross income (AGI) amount reported on the bottom of page one of your Form 1040 with certain add-backs that may or may not apply in your situation.

Income Limit

For 2017

Unmarried individual MAGI phase-out range $118,000 (up from $117,000 in 2016)
Married joint filer MAGI phase-out range $186,000 (up from $184,000 in 2016)

At first glance, these figures do make it look like a self-employed person with a robust income is unlikely to be eligible for contributions. But take another look.

A self-employed individual's modified adjusted gross income is likely to be considerably lower than the MAGI of another person who is in roughly equivalent circumstances and who is an employee. Reason: Successful self-employed taxpayers usually have hefty deductions for:

  • Certain expenses incurred in the business (such as deductions for rent, an office in the home or a computer system).
  • Contributions to a tax-deferred retirement plan (typically, a SEP, a defined contribution Keogh plan or a solo 401(k) plan).
  • Health insurance premiums.
  • The write-off for 50% of self-employment tax.

These deductions, along with others, are available to self-employed people and are subtracted in arriving at MAGI. Therefore, a self-employed person can have relatively high gross income from his or her business while having a much lower MAGI.

Bottom Line: Many self-employed individuals qualify for Roth IRA contributions without even realizing it.

Think a Deductible Plan is the Only Way to Go? You Could be Wrong

Clearly, it's a good idea to deduct contributions to a tax-deferred retirement plan (such as a SEP) set up for your self-employed business. However, that doesn't necessarily mean such contributions

More Roth IRA Advantages

  • At age 70 1/2, you must begin to take withdrawals from a traditional IRA or face steep penalties. But with a Roth IRA, you don't have to take withdrawals at any age, meaning the account can continue to grow tax free.
  • Contributions can be made as long as you have earned income, no matter how old you are.
  • A Roth IRA can be passed on to your heirs, who can take tax-free withdrawals for decades if certain steps are taken.

are preferable to contributing the same amounts to a Roth IRA. The best way to evaluate the issue in your situation is to look at two assumptions:

Assumption #1: You will always take the tax savings from making a deductible retirement plan contribution and either invest the money in a taxable retirement savings account or use the money to make a bigger deductible retirement plan contribution.

Assumption #2: You expect to be in a lower tax bracket during your retirement years, which means you're generally well advised to make a deductible contribution to a tax-deferred retirement plan, instead of a Roth IRA.

In real life, though, you may not be disciplined enough to follow through with the first assumption. And the second assumption can also be problematic when you consider the federal budget deficit and politics. If it turns out that you will actually pay higher tax rates during your retirement years because tax rates go up, you'll wish you had made Roth contributions when you had the chance.

Key Point: Even if both of the above assumptions are true, you should still make Roth IRA contributions if you have cash left over after making the maximum deductible contributions to a tax-deferred retirement plan. In other words, don't just do one or the other. Contribute to both! Talk with your EHTC Tax Advisor if you are unsure.

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Tags: Roth IRA, Income, Roth

It's Time to Review Your Financial Planning Options

Posted on Mon, Aug 29, 2016
Fall is a good time to pause and review your financial planning strategy. A lot can happen in a year. If your personal life, market conditions or tax laws have changed, you may need to revise your long-term financial plans. Here are some retirement and estate planning considerations that may be worthwhile.

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Tags: Roth IRA, Traditional IRA, Gifts, Charitable Giving, Charitable Donations, Roth IRA Conversion

Help Your Kids Build a Fortune With a Roth IRA

Posted on Thu, Jan 28, 2016

If you have teenage children or grandchildren with part-time jobs, there's a tax-favored way to help them save money for college, a first home -- and even retirement. By socking away some of their earnings in a Roth IRA, your youngsters can begin a savings plan that can grow into a small fortune.

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Tags: Roth IRA

Last-Minute Tax Savings: Hurry Before Time Runs Out

Posted on Mon, Dec 07, 2015

Another tax year is drawing to a close. But there's still time for individual taxpayers to trim their tax liabilities for 2015 and beyond, before the New Year begins. Here are 10 eleventh-hour moves that you can still make before the clock strikes midnight on January 1.

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Tags: Tax, Roth IRA, Charitable Donations, College Expenses, RMD

IRS Issues Clarification of Once-a-Year IRA Rollover Limit

Posted on Mon, Nov 17, 2014

There have been several twists and turns this year relating to the "once-a-year rule" for IRA rollovers. In the latest move, the IRS has provided additional guidance in the wake of a controversial U.S. Tax Court decision applying the rule to all IRAs owned by an individual. Significantly, the IRS is providing taxpayers with greater flexibility in their year-end tax planning decisions.

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Tags: EHTC Article, Roth IRA, Traditional IRA, Newsletter, Articles, Taxable, Taxes, IRA, Penalty Tax

IRS and Social Security Announce Increased Benefits for 2015

Posted on Mon, Nov 03, 2014

With the 2015 tax year right around the corner, there is good news coming from the IRS. According to a recent announcement, the tax agency has increased several tax breaks due to inflation adjustments.

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Tags: EHTC Article, Roth IRA, Traditional IRA, contributions, IRA phase-out, Newsletter, Articles, Taxes, IRA

Can You Have Too Much Money in Tax-Deferred IRAs?

Posted on Thu, Oct 16, 2014

In some cases, individuals reach a point where deferring taxes to the max is counter-productive.

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Tags: EHTC Article, Roth IRA, Traditional IRA, Newsletter, Articles, Taxable, Taxes, IRA, Penalty Tax