The Tax Cuts and Jobs Act creates an opportunity for retirees to pay attention to the new rules in effect, now that the tax filing deadline has passed and most accountants have more time to create a tax road map with all the financial accounts. The goal of creating a tax road map is to determine strategies that may allow taxpayers to pay less — or even nothing — on taxes this year and in the future.
Being prepared for the future is important, so every dollar in your retirement account matters.
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A quick check of our national debt shows that it’s over $21 trillion and still growing.1 Every taxpayer would need to write a check of over $174,000 to pay off this debt. So, here we are with massive national debt and unfunded liabilities with historically record-low tax rates — the math just doesn’t add up to me. It would be logical to conclude, at some point in the future, that tax rates could be much higher for retirees. Waiting could be a costly mistake!
From technology, like computers, and a 24-hour news cycle to the disappearance of traditional pensions and working for one company for an entire career, today’s retirement landscape isn’t the same one our grandparents knew. Today’s retirees are on the move and in more control of their financial future. They’re able to travel across the country for leisure, fly to see their grandkids, and get away from the cold weather in the winter. Part of our success comes from the priceless life lessons from our grandparents; they lived through tough times like the World Wars and the Great Depression, which taught us the value of being prepared.
Being prepared for the future is important, so every dollar in your retirement account matters. Believe it or not, President Trump’s new tax plan can actually help retirees better prepare for their retirement journey ahead; let’s focus on how a Roth IRA under the new tax laws can help:
Lower Tax Rates
Someone nearing or in retirement can utilize the Tax Cuts and Jobs Act through a Roth conversion that will leverage the new, lower tax rates. Consequently, this might be an effective option for many families. Several people we meet with have most of their retirement savings in tax-deferred retirement accounts, like 401(k)s and traditional IRAs.
I hear retirees say things like, “I didn’t think I was eligible for a Roth IRA,” or, “I thought Roth IRAs are just for the younger kids.” That isn’t always the case.
Let’s take 60-year-old retired couple Mike and Sue as an example. They have a combined yearly income of $80,000. At first glance, they don’t need any additional income from their retirement accounts, so they defer the withdrawals and taxes until they are forced to take required minimum distributions at age 70½.
That assumption could result in ten years of missed opportunities with the new standard deduction of $24,000. This places Mike and Sue in the 12% tax bracket, which might allow them to convert another $21,400 into a Roth IRA and pay only 12% in taxes, with the potential of having tax-free benefits in the future.
This hypothetical account could create over $200,000 of tax-free dollars over the next 10 years for Mike and Sue to enjoy during their retirement years. Plus, an added bonus: Any growth on the Roth IRA can be used tax-free as well, if they know and follow the rules for withdrawals.
Understanding the workings of a financial product, like a Roth IRA, can make a significant impact on your retirement income.
Using Your Roth Conversion for Your Beneficiaries
The other added benefit of a Roth conversion is for the account owner’s beneficiaries, usually the family. If the account owner doesn’t spend the Roth IRA during their lifetime, those tax-free benefits can transfer over to their beneficiary. For traditional retirement account owners, this is usually another spot where the tax time bomb can go off, especially for non-spousal beneficiaries. Remember, taxes for traditional retirement accounts that haven’t been paid aren’t forgotten. If the kids take a lump-sum payout on a traditional retirement account, taxes could be as high as 37%.2 By utilizing these strategies with a Roth IRA account, the owner leaves money to beneficiaries; taxes could be as low as 0% for their lifetime.
You may be wondering how this can apply to you and your loved one. Every situation is unique, so the best thing to do is to set up a meeting with an accountant and a financial professional, who can run the numbers and give personalized advice that best suits your needs and retirement goals.
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