Digest

This episode of Your Money, Your Wealth podcast delves into the complexities of Roth IRA conversions, offering guidance on various scenarios. The hosts address a listener's question about using IRA funds to pay taxes on a Roth conversion, emphasizing that this strategy is generally not recommended due to the potential for double taxation. They also discuss the possibility of withdrawing Roth contributions before age 59 1/2, highlighting the potential drawbacks of losing tax-free growth. The episode then explores the rules for required minimum distributions (RMDs) on inherited Roth accounts, explaining that non-spousal beneficiaries must fully distribute the account within 10 years of the original account holder's death. The hosts also provide insights on Roth conversions for retirees, emphasizing the importance of considering tax brackets and income sources. They advise listeners to carefully plan their Roth conversion strategies to minimize tax liabilities and maximize tax-free growth in retirement.

Outlines

00:00:00

Roth Conversion Strategies

This Chapter discusses the pros and cons of using IRA funds to pay taxes on Roth conversions, emphasizing the potential for double taxation. The hosts also explore the possibility of withdrawing Roth contributions before age 59 1/2, highlighting the potential drawbacks of losing tax-free growth.

00:14:23

Roth Conversion for Retirees

This Chapter focuses on Roth conversions for retirees, specifically addressing a listener's question about whether to convert $50,000 or $75,000 to Roth. The hosts advise considering tax brackets and income sources to minimize tax liabilities and maximize tax-free growth in retirement.

00:19:38

Roth Conversions During Bridge Years

This Chapter explores Roth conversions during the bridge years between early retirement and full retirement. The hosts discuss a listener's strategy of selling a rental property and using the proceeds to fund Roth conversions during this period. They advise on tax efficiency and the importance of considering income sources and tax brackets.

00:28:13

Required Minimum Distributions on Inherited Roth Accounts

This Chapter delves into the rules for required minimum distributions (RMDs) on inherited Roth accounts. The hosts explain that non-spousal beneficiaries must fully distribute the account within 10 years of the original account holder's death. They also discuss the rationale behind RMDs and the importance of tax planning for inherited retirement accounts.

Keywords

Q&A

• Is it a good idea to use IRA funds to pay taxes on a Roth conversion?

  Generally, it's not recommended to use IRA funds to pay taxes on a Roth conversion because you're essentially paying tax on tax. However, there may be exceptions for individuals with very large IRAs and high required minimum distributions.

• Can I withdraw Roth contributions before age 59 1/2 without penalties?

  Yes, you can withdraw your Roth contributions before age 59 1/2 without penalties. However, it's important to note that you'll also be withdrawing any earnings on those contributions, which will be subject to taxes. This strategy is generally not recommended because you'll be losing out on the tax-free growth potential of the Roth IRA.

• What are the rules for required minimum distributions (RMDs) on inherited Roth accounts?

  Non-spousal beneficiaries of an inherited Roth IRA must fully distribute the account within 10 years of the original account holder's death. These distributions are tax-free. Spouses, however, can choose to take distributions over their own life expectancy.

• Should I do a Roth conversion if I'm in the 24% tax bracket?

  Whether or not to do a Roth conversion depends on your overall financial situation, including your income sources, tax bracket, and retirement goals. If you can afford to pay the taxes on the conversion and expect to be in a higher tax bracket in retirement, it may be a good idea. However, it's important to carefully consider the potential tax implications and consult with a financial advisor.

• How do I manage my finances during the bridge years between early retirement and full retirement?

  During the bridge years, it's important to carefully manage your finances and consider strategies for generating income and minimizing taxes. This may involve selling assets, adjusting your spending, and exploring part-time work opportunities.

• What are some strategies for tax efficiency in retirement?

  Strategies for tax efficiency in retirement include Roth conversions, asset allocation, and investment choices. It's important to consider your tax bracket, income sources, and retirement goals when making these decisions.

• How do Medicare premiums work?

  Medicare premiums are the monthly costs associated with Medicare coverage. The amount you pay for Medicare premiums depends on your income level. The higher your income, the higher your premiums.

• What is the difference between a traditional IRA and a Roth IRA?

  Traditional IRAs offer tax deductions on contributions, but withdrawals are taxed in retirement. Roth IRAs do not offer tax deductions on contributions, but withdrawals are tax-free in retirement.

• What is a 401(k)?

  A 401(k) is a retirement savings plan offered by employers. It allows employees to contribute a portion of their pre-tax income to the plan, which grows tax-deferred. 401(k)s can be traditional or Roth, with similar tax implications as IRAs.

• What is the Thrift Savings Plan (TSP)?

  The Thrift Savings Plan (TSP) is a retirement savings plan for federal employees. It is similar to a 401(k) in that it allows employees to contribute a portion of their pre-tax income to the plan, which grows tax-deferred. TSPs can be traditional or Roth, with similar tax implications as IRAs and 401(k)s.

Show Notes