If there’s someone who loves to talk to people about Roth conversion decisions, it’s Bud Kasper. Bud is a converted Roth-aholic and has even made T-shirts to declare it. Bud’s son, Matt Kasper, echoes his dad’s enthusiasm about Roth conversions. But rather than list all the reasons to do Roth conversions, Roth IRAs, Roth 401(k)s—all things Roth—Matt reviewed Roth conversion decisions for 2023 in a case study on the Modern Wealth Management Educational Series.

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Bud Kasper and Dean Barber Talk Roth-A-Holics on America’s Wealth Management Show:

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Roth Conversion Decisions for 2023 – retirement planning Educational Series

As we dive into the new year of 2023, retirement planning becomes paramount for individuals looking to ensure a financially secure future. One crucial aspect of retirement planning often overlooked is the decision to convert traditional IRAs or 401(k)s to Roth IRAs – a process known as Roth conversion. This article aims to provide valuable insights and guidance on making informed decisions regarding Roth conversions in 2023.

A Roth conversion involves moving funds from a traditional IRA or 401(k) account, where contributions are typically tax-deductible, to a Roth IRA, where contributions are made with after-tax dollars but qualified withdrawals are tax-free. The main benefit of a Roth conversion is the potential for tax-free withdrawals during retirement, providing a significant advantage over traditional retirement accounts.

A key factor to consider when contemplating a Roth conversion is the future tax landscape. Tax laws and rates can fluctuate over time, making it essential to assess whether an individual expects their tax bracket to be higher or lower in retirement. If one anticipates higher tax rates in the future, a Roth conversion may be a wise decision to lock in current lower tax rates.

Another crucial aspect of Roth conversions is the concept of “tax diversification.” By diversifying retirement accounts across traditional and Roth holdings, individuals gain flexibility in managing their tax liability during retirement. This strategy allows for strategic withdrawals from different accounts, minimizing taxable income and maximizing retirement income.

Timing plays a significant role in Roth conversions. Converting during a low-income year, such as early retirement or a gap between jobs, allows individuals to pay lower taxes on the converted amount. Furthermore, converting before reaching the age of 72 (the age when required minimum distributions (RMDs) kick in for traditional retirement accounts) can help mitigate future tax burdens.

It’s essential to note that Roth conversions are taxable events, meaning the converted amount will be added to your taxable income for the year of conversion. Careful planning to manage the tax impact is crucial. Ideally, it is advisable to pay the taxes due on the conversion from non-retirement account funds, thus preserving the full converted amount for growth.

One critical consideration for Roth conversions in 2023 is the recent Treasury Department proposal to have Roth conversions triggered by over $600,000 in income. This change intends to generate additional revenue, but its implementation, if approved, could significantly impact high-income individuals’ ability to convert. Monitoring developments in tax legislation is imperative while making Roth conversion decisions.

Finally, the age at which one plans to retire also influences the Roth conversion strategy. Converting earlier allows for a longer period of tax-free growth and may make sense for individuals with an extended retirement horizon. On the other hand, converting in proximity to retirement ensures that converted funds are immediately available for tax-free withdrawals.

In conclusion, Roth conversions for retirement planning in 2023 require careful consideration of various factors. Assessing future tax rates, diversifying retirement accounts, identifying optimal timing, and monitoring legislative changes are all crucial elements in making informed decisions. Consulting with a financial advisor or tax professional is highly recommended to tailor the Roth conversion strategy to individual circumstances effectively. By taking thoughtful steps towards tax-efficient retirement planning, individuals can set themselves up for a financially secure and rewarding future in 2023 and beyond.