In a recent podcast, called The Great Retirement Debate, Ed Slott, a nationally recognized IRA expert and Jeffrey Levine, the chief planning officer at Buckingham Strategic Wealth, debate the pros and cons of certain retirement strategies and discuss eight reasons why you may want to avoid a Roth conversion.

The first reason is if the upfront tax burden is too much. We find that most people in the 22% bracket or 24% bracket are OK paying the tax now. But, if you’re up in the 37% tax bracket, and think you’ll be in a lower tax bracket later, then paying the tax now may not be right for you.

The second reason is that conversions can interfere with your charitable giving strategies. Once you reach the age of 70 1/2, you can do a qualified charitable distribution where you give money to a charity directly from your IRA and avoid the taxation on it. You can only do this if you have traditional IRA money. Traditional TSP doesn’t allow it. Depending on your situation, keeping some traditional money may be what’s needed. So if this is you, then maybe Roth Convert some, but not all.

Another reason is that some people may want clarity about the tax policy. Both think it’s safer to assume the tax rate will increase in the future. And if that’s true, that would be a reason you might want to do Roth. But the Trump tax cuts did lower taxes, which shows taxes don’t always go up. If the tax cuts expire, then rates will go back up. But if you just want more clarity, then you may want to hold off on doing Roth for now.

Another reason you may not want to Roth convert everything is if your beneficiaries will have very low income. If you leave money to your children, they will pay taxes at their tax bracket. If their tax brackets are going to be dramatically less than yours, that may be an argument to not do so much Roth.

Another reason is if you anticipate having large medical bills. It’s not uncommon to see people have $50,000 or $100,000 of medical expenses in a single year. It could be hospital bills, long-term care costs, or renovations to your home for medical reasons. If the only anticipated money to pay this would be an IRA, then you may not want to convert it all. As you take the money out from IRAs, it will be taxed, but then you can claim the medical deduction to offset a lot of it. Depending on the size of the expenses, it may be better to use traditional IRA to cover the cost.

Another reason people may be hesitant to do Roth conversions now is that Roth Conversions are permanent. Years ago you could do a Roth conversion in the beginning of the year and if by the end of the year, it no longer made sense, you could do a re-characterization and undo it. Now you can no longer do that.

Another reason is for high earning self-employed people. In the 2017 tax overhaul, there is a QBI deduction that allows business owners to deduct up to 20% of qualified business income. Ed Slott said, “if you were under certain income limits for certain groups, without getting into the weeds on this, a Roth conversion can actually kill this deduction opportunity. It can really cost you, in this sense, to convert in the wrong year.” If you’re a federal employee, this probably doesn’t pertain to you.

The last reason is that some people distrust that Roth accounts will always be tax free. Slott said, “I don’t think they’ll do it, if only because it would kill the golden goose. The Roth IRA produces a lot of revenue, but if this is a concern that keeps you up at night, that may be a reason to not convert.”

When you look at the amount of money that is traditional compared to the amount that is Roth in America, the traditional amount is much larger. If the IRS needs more tax dollars, all they have to do is change the tax brackets to be able to tax the traditional money at a higher rate. Those tax brackets change all the time and nobody really gets mad about it. But for Congress to go back and double tax the Roth, that would send people into an uproar. So I don’t think they would do it just because it would make people extra upset, but also because mathematically, it just doesn’t make as much sense. There’s a lot more money that is already taxable, where all they have to do is raise the tax rates on it.

The information provided is not intended as tax or legal advice. Figures shown are for illustrative purposes only furthermore, the information nor the illustrations provided may not be used to avoid any tax penalties. This content represents the general views of Christy Capital Management and should not be regarded as personalized investment advice Nothing herein is intended to be a recommendation. The opinions expressed are subject to change without notice. Retirement Benefits Institute, Inc., and a portion of its contents merged with Christy Capital Management Inc. Brandon Christy, former President of Retirement Benefits Institute, is also the current President of Christy Capital Management, Inc, a registered investment adviser….(read more)

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When it comes to retirement planning, many individuals are faced with the decision of whether or not to invest in a Roth Thrift Savings Plan (TSP). While there are certainly benefits to choosing this option, there are also several reasons why one might want to reconsider. As a financial advisor at Christy Capital Management, I have seen firsthand the drawbacks of opting for a Roth TSP, and I believe it is important for individuals to carefully consider their options before making a decision.

One of the main reasons to avoid a Roth TSP is the fact that contributions are made with after-tax dollars. This means that you are essentially paying taxes upfront on the money you are investing, which can significantly reduce the amount of money you have available to invest. While the idea of tax-free withdrawals in retirement may sound appealing, it is important to consider whether the initial tax hit is worth it in the long run.

Another reason to think twice about a Roth TSP is the potential for higher taxes in retirement. While it is true that withdrawals from a Roth TSP are tax-free, there is no guarantee that tax rates will remain the same in the future. If tax rates increase, you could end up paying more in taxes on your withdrawals than you would have if you had chosen a traditional TSP or other retirement savings option.

Additionally, a Roth TSP may not be the best choice for individuals who expect to be in a lower tax bracket in retirement. If you anticipate having lower income in retirement than you do currently, it may make more sense to defer taxes on your contributions until you retire and are in a lower tax bracket. This can result in significant tax savings over the long term.

Finally, it is important to consider the investment options available in a Roth TSP. While the TSP offers a variety of funds to choose from, they may not always be the most optimal for your individual financial goals and risk tolerance. By investing in a traditional IRA or other retirement account, you may have more control over your investment choices and be able to customize your portfolio to better align with your personal financial objectives.

In conclusion, while a Roth TSP can be a valuable retirement savings option for some individuals, it is not the best choice for everyone. Before making a decision, it is important to carefully consider your individual financial situation, tax considerations, and investment goals. As a financial advisor at Christy Capital Management, I am here to help you navigate these decisions and create a comprehensive retirement plan that is tailored to your specific needs. Contact me today to schedule a consultation and start planning for a secure financial future.