With taxes ‘on sale’ it could be time to convert to a Roth individual retirement account

FALLBROOK – Retirement can open up a whole new way of life for Americans ready to bring their working years to an end, but at least one thing doesn’t change.

The IRS still keeps a watchful eye on your income including whatever amount is pulled from the individual retirement account or 401(k) that has been building into a nice, hefty nest egg for the past decades.

Uncle Sam has been waiting for years – possibly decades – to tax that money because the deposits made were pretax, meaning there was no taxes paid on the income contributed to the accounts.

That tax-deferral system works well, until retirement time arrives and people need the money.

“When you defer taxes, eventually it catches up with you,” Gary Marriage Jr., CEO of Nature Coast Financial Advisors, said. “Suddenly, your IRA or 401(k) isn’t worth as much as you thought because every withdrawal you make potentially can be taxed.”

But there’s an answer, and with President Donald Trump and Congress looking at tax cuts, now would be the time to take advantage, Marriage said.

Those traditional IRA and 401(k) accounts can be converted to a Roth IRA, which isn’t taxed when withdrawals are made. That doesn’t mean people can avoid paying tax on that money, Marriage said, instead people will pay them when they make the conversion. But later when they reach retirement, they’ll be able to make withdrawals the rest of their life tax free.

“Taxes are about to be on sale,” Marriage said. “Over the next four to five years, your tax bracket is probably going to be as low as it ever will be.”

He said there are some facts worth knowing about Roth conversions.

It’s a good idea to space out the conversion process. Most people wouldn’t want to take the tax hit all at once, and they don’t have to. They can transfer the money into a Roth in increments over the course of a few years. So if, for example, they space out the conversion over five years, the tax is spaced out over five years as well. A few factors determine how much is convertible in the first year, but Marriage said about 40 percent of the people he has worked with were able to convert half of it in the first year.

Consider the best age to do it. A conversion can be done regardless of the account holder’s age, but Marriage said it’s his experience that people 59 and one-half to 74 years old benefit the most.

Start with a Roth if possible. Some employers now offer a Roth 401(k) as an option. Employees should take advantage of that, Marriage said. They won’t get to defer their taxes on the portion of their income they contribute to the account, but the interest grows tax free and they’ll avoid taxes come retirement time.

Marriage said he recently did a conversion for a client where he had calculated that if the client lived to be 90, they would have paid nearly $1 million in taxes on IRA withdrawals.

“Switching to a Roth lowered that to $200,000,” he said. “I know that still sounds like a lot, but I’d rather pay $200,000 than nearly $1 million.”

Gary Marriage Jr. is the founder and CEO of Nature Coast Financial Advisors, which educates retirees on how to protect their assets, to increase their income and to reduce their taxes. Marriage is also the founder of Operation Veteran Aid, an advocate for wartime veterans and their families. For more information, visit www.naturecoastfinancial.com.