Dallas Tax Planning – Roth Mini Series Finale
As a retirement advisor, I’ve done a lot of analysis of retirement portfolios, and it’s been my conclusion that investors should be building their portfolios to target about a 6% return. That’s just a rule of thumb, but it’s a realistic target. Here’s the problem with equity and fixed index annuities. They were originally designed for a 6% to 8% return, but the way the market is now, they probably aren’t going to give you that 6% to 8%. Maybe if they are part of an income rider you might be able to get that return, but make sure that fits into your overall investing plan.
Once again, a lot of retirement advisors aren’t looking out for you; they are looking out for opportunities to sell you the product that makes them the most commission. Odds are good you weren’t even asked to spell out your whole investing plan before you got a recommendation to buy into the annuity. Are they all bad? No, of course not. But don’t fall into the trap of doing something that hurts your financial picture so you can fatten your advisor’s bottom line.
Take it from a long-standing retirement advisor: pay with outside money. If you have an IRA you are converting to a Roth, let’s say $100,000. Ideally, you want to have the same $100,000 in the Roth when you are done. Now, you’re going to owe maybe $20,000 to $25,000 in taxes when you make the conversion. I recommend that you pay those taxes with outside money. In other words, don’t take $100,000 from your traditional IRA, pay $25,000 in taxes, and put the remaining $75,000 in the Roth. Find the money to pay the tax bill somewhere else if you can.
The beauty of a Roth is that, as long as congress keeps their hands out of the pot, the money in the Roth grows tax free, and you can take it out tax free – ask your retirement advisor about this. Don’t miss the opportunity to stuff that Roth IRA as full as you can during this conversion. You’re missing out on some of the biggest benefits of a Roth if you siphon off some of the IRA money to pay the tax. Keep the converted money intact if you can by paying the tax with money that is outside your retirement funds.
Do the math on the taxes, or ask your retirement advisor for help. In many cases, you’re better off taking the tax it this year instead of spreading it out over a couple of years. Remember that the tax rate you pay is climbing into 2011 and 2012, so you can save money now if you can afford to pay all the taxes this year. On the other hand, if you just retired, maybe it’s smarter to spread the tax impact out, depending on the size of the Roth conversion. Do the math.
Make sure that a Roth conversion fits into your overall investing plan you put together with your retirement advisor. It’s an interesting anomaly in the tax code, and it works great for some portfolios. That does not mean it’s necessarily the right thing for you. I bet Roth conversions are going to hurt the financial plans of a lot of people who think they are doing the right thing. Don’t blow up your plan just because there’s a cool tax benefit available.
If you’ve talked with your retirement advisor, and you don’t need the money you’ve accumulated in your lifetime, consider a Roth IRA as a way to leave a legacy to your descendants. Maybe you know that you’ll die with a large sum of money still in your retirement fund. Are your kids going to be responsible with that money? Are they going to be able to just let that money sit for 30, 40, even 50 years after you pass away? If so, the long-term financial benefit of putting that money in a Roth is going to be absolutely substantial. You can leave an amazing legacy to future generations of your family.
