Tax & Money Tip of the Week:
Throwing Out The Old Rules of Money
May 11, 2011 | No. 42
Old School Rule #2
Retirement Planning Old School Wisdom: Convert your traditional IRA to a Roth IRA. New unconventional advice: Forget about doing this; Roth IRAs are designed to get you to pay taxes EARLIER ….
Why It’s Smarter
Converting to a Roth IRA does nothing to increase your wealth.
For example, lets say a client in the 25% federal income tax bracket has a Regular IRA of $100,000. If he decides to convert to a Roth he would have to pay tax of $25,000 immediately and would be left with only $75,000. Lets say the client doubles in 10 years this Roth IRA shrewdly via investing to $150,000. Instead, assume the client keeps his regular IRA of $100,000 and doubles it in 10 years to $200,000. After paying taxes, he would wind up with $150,000, the same amount but without the hassles of paying taxes, etc.
Key point: Congress may decide to tax Roth IRA withdrawals, subject them to 28% AMT tax or reduce the marginal tax rates (via eliminating certain deductions). For most situations, paying taxes sooner is NOT better than keeping wealth tax sheltered and using the power of tax compounding to your advantage.
If you should have any questions, please don’t hesitate to give us a call.
Questions or Comments?
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Mark Vitek, CPA/PFS, CFP®
…until next week.