If you want to win the game of retirement, you have to know the rules.
I recently spoke with my good friend and personal mentor, America’s IRA Expert, Ed Slott about what he believes is going to happen with IRAs and taxes in 2021. Ed knows how IRA tax rules work better than 99.999% of all tax professionals.
He is nationally recognized as an IRA distribution expert, professional speaker, television personality, and best-selling author who is known for his unparalleled ability to turn advanced tax strategies into understandable, actionable, and even entertaining advice.
I asked him to share some of his best tips to help you thrive in 2021. Here's what he came up with...
1. Have a proactive tax strategy in place to diversify your tax risk.
The writing is on the wall. You should expect that taxes will increase and plan for that while taking advantage of the exceptionally low rates we have right now.
There will come a time in the not too distant future when the bill for the pandemic bailout will come due and everyone will be paying for it with their tax dollars. Some economists are predicting that taxes could easily double.
To avoid paying unnecessary taxes on your retirement accounts, right now is the best time to consider working with a financial professional to create a strategy for moving some of your retirement money out of your taxable accounts to tax-free accounts.
Yes, you will have to pay taxes on that money now. However, the tax rates right now are the lowest we will see in our lifetime. And, one of the things you want to avoid is the pain of paying higher taxes on your retirement funds when the tax rates sky-rocket.
2. The amount of tax you pay during retirement will have a huge impact on how much money you have to spend during retirement.
The secret to keeping more of your hard-earned money for your retirement is to pay your taxes up-front so you don't have to pay any more tax on it later on.
The best tool to do that is your money is currently in a traditional (pre-tax) IRA is a Roth conversion. Roth conversions are a big-picture, long-term strategy and they are the secret to growing tax-free money into more tax-free money for your retirement.
The way to do that most effectively is to work with a financial professional to create a strategy to convert at least a portion of your pre-tax retirement funds into no-tax retirement funds while taxes are so low.
3. An added benefit of moving money into a Roth IRA is that there are no RMDs (Required Minimum Distributions).
If your retirement funds are in a pre-tax account, you will be REQUIRED by law to start taking money from that account when you turn 72 years of age -- even if you don't want or need the money.
The penalty for not taking a distribution correctly is exceptionally painful -- a whopping 50% of your RMD distribution.
To give that some real-life context, if you have an IRA worth $200,000 and you are 72 years old, your RMD would be around $7,813. If you somehow miss taking that required distribution you could owe the IRS a penalty of $3,907! OUCH!! Please, don't let that happen to you!
If you’d like to explore the possibilities a Roth conversion strategy for your individual retirement situation, please feel free to fill out the form below and someone from our office will get back to you within 48 hours.