Roth Conversion by the Decades, Ep #171

What if you could take action now so that you have significantly more tax-free savings to utilize in retirement?

On this episode, we’ll take a look at an often misunderstood tax planning opportunity.

The Roth conversion is a tool that can benefit you throughout different stages of your retirement saving journey. Today you’ll learn how to take advantage of Roth conversions during various periods of life. Listen in to learn the opportunities and pitfalls of Roth conversions.

The benefits of Roth conversions

We talk about using Roth conversions a lot in the early retirement years, however, they can be a useful saving device throughout your retirement saving journey. Roth conversions will help you reduce your overall lifetime tax liability. The way this works is that you pay the taxes on the converted funds now and enjoy tax-free growth until the money is ready to withdraw (tax-free!) in retirement. Roth conversions give you the opportunity to pay taxes now while rates are low. They allow you to take advantage of the current historically low tax rates without the worry of what the future tax code will bring.

Taking advantage of Roth conversions in your teens and twenties

We love to see young people taking advantage of the magic of compounding by investing for retirement. Many companies offer a 401K matching program so young people can further enjoy the free money offered by the company match. However, once they leave these jobs, some people opt to take an early distribution. Instead of taking this penalty, young people could pay the taxes now and roll their 401K into a Roth IRA. This would allow them to take advantage of decades of tax-free growth.

There are 4 Ls that young people have on their side

  1. A low tax bracket.
  2. Low balances to convert.
  3. A lower tax hit.
  4. A long time horizon for tax-free earnings.

One thing that young people should remember before they convert their 401Ks into Roth IRAs is to have enough cash on hand to pay the taxes on their earnings.

Roth conversions in your 30s and 40s

Life is busier once you reach your 30s and 40s. You may be climbing your way up the career ladder while raising a family. This might be a time of life when you think doing a Roth conversion doesn’t apply to you. But there are plenty of opportunities to do Roth conversions.

Any of these times would be ideal to do a Roth conversion: changing careers, realizing business or investment losses, or if one spouse decides to stay home. This is a time of life when doing a Roth conversion requires more detailed planning, but it is important to look for ways to take advantage of the silver linings. Listen in to hear if a backdoor Roth IRA would be a good choice for your situation.

The complex 50s and 60s

The 50s and 60s can be an ideal time to convert funds into a Roth, however, there are pitfalls to be aware of as well. You’ll want to wait until your tax conditions are optimal to reduce future RMDs while considering whether you may retire early.

This could be a good time to enlist the help of a financial advisor. A fiduciary can help walk you through the complexities of Roth conversions during this time of life. Don’t miss out on hearing all the risks and advantages of Roth conversions by the decades. Press play to listen.

Outline of This Episode

  • [2:38] Benefits of Roth IRAs
  • [4:09] How to take advantage of Roth IRAs in your teens and 20s
  • [8:38] Life is hectic in your 30s and 40s
  • [14:27] In your 50s and 60s retirement is on the horizon
  • [19:10] Opportunities in your 70s, 80s, and beyond
  • [28:30] Today’s progress principle

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