3 HUGE Roth IRA MISTAKES That Can Cost You Thousands!
In this video, I want to talk about Roth IRA mistakes that you could be making that could cost you thousands of dollars and tax dollars in retirement.
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What is a Roth IRA?
A Roth IRA is an individual retirement investing account where your Roth IRA contributions and Roth IRA conversions grow tax free. A Roth IRA offers tax free growth and tax free retirement income as long as you follow the Roth IRA retirement rules set out by the IRS.
Roth IRA rules, set by the IRS, dictate that as long as you’ve owned your account for 5 years and you are age 59½ or older, you can withdraw your contributions when you want without paying federal income taxes. Any Roth IRA Conversion dollars can be used for retirement income at any time as long as you satisfy the 5 year waiting period for each individual Roth IRA conversion.
BUT what are some of the mistakes you could be making in your Roth IRA?
1. Using Your Traditional IRA to pay Roth IRA Conversion taxes
2. Not Understanding Your Tax Bracket When Completing Roth IRA Conversions
3. Not Understanding IRMMA Retirement Taxes When Completing Roth IRA Conversion.
Retirement income strategies and retirement income planning are two big pieces to anyones retirement planning calculator. Whether you are wanting to know strategies for “retirement planning at 30″, “retirement planning at 40″, “retirement planning at 50″, or even “retirement planning at 60″ understanding how much retirement income that you want versus how much you need gives you a roadmap to follow to and through retirement.
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Pearl Wealth Group
Drew Blackston, CRC® & RFC®
Office: 813-807-5060
Info@pearlwealthgroup.com
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Tax bracket management appears to be the biggest challenge I will have when retired. Thanks Drew. I've started playing with some ideas for 55 and beyond to convert chunks each year until SSA kicks in. I'm pretty sure that even in retirement we will still be in what is now the 22-24% brackets but I want to try to fill up what I can when I can. Frankly it seems right now with accounts beaten down that doing some conversions now would lower the tax burden of the transfers assuming one has outside money to pay the tax with. Would you agree with this as a concept for down markets?
I did a Roth conversion from my TIAA account after retirement. All our retirement savings were in taxable TIAA accounts, so I paid the tax out of TIAA. My marginal tax rate was 12% (married with taxable income under $78,000). We moved to a state with an income tax this year (Oregon), so I expect to pay 20% state and Federal tax in the future. The numbers tell me I am money ahead by doing this, if say, my assets conservatively grow by 50% in ten years. (Sorry, the two of us did not want to stay in Wyoming any longer.)
Example 2, showing the impact of the incremental $10,000 in Roth IRA conversion, the way you present the overall tax is that $90k of income (before deductions) would equal $24k but that is not the math.
On the first $10,275 he would pay 10% tax or $1,027.50
On the income earned between $10,275 and $41,775 (which is $31,500) he would pay 12% tax or $3,780.
On the income between $41,775 and $80,000 (which is $38,225) he would pay 22% tax which is $8,409.50.
Now, when he does the conversion he would earn within the 22% bracket and into the 24% bracket like this:
From $80,000 to $89,075 (which is $9,075) he would pay 22% tax or $1,996.50. From $89,075 to $90,000 (which is $925) he would pay 24% tax or $222.20. The total of all tax ($1,027.50 + $3,780 + $8,409.50 + $1,996.50 + $222.20 = $15,435.50. This is not $21K as referenced. Divide this by $90,000 and he has an effective tax rate of about 17%.
Drew, you normally provide really good information, but this time you gave some really misleading information. At the most the person’s taxes would have been $2,400 on this $10,000 conversion, which at the most would have been $200 more than the $2,200 he would have paid at the 22% rate. Most people would not consider this extra $200 to be excessive, I agree that you should do what you can to minimize taxes, but even paying extra taxes right now still might be beneficial by not having to pay a higher tax rate later.
Good advice
Thank you very much for the information.
Regarding the tax brackets mentioned, does being married change the income level and tax percentage??
Thanks again.
Great content as always Drew. In this case when you get pushed into the next bracket is it only the amount over the current bracket that gets taxed at the higher amount?