Tax Talk – To Convert or Not to Convert

I was recently thinking about the game show Deal or No Deal. Do you remember that? It was all these briefcases and each contestant gets to choose different briefcases with varying amounts of money. And they answer questions to win the prize and either take that briefcase with the amount of money in it or exchange it for another one.

The top prize was a million dollars, while the bottom was about a penny. So it was a deal or dare – do you take it or try your luck for more?

When it comes to taxes, sometimes it’s similar to this game, Deal or no Deal.

You see, there are things we can do now that give us lower taxes now, that might end up making us pay more taxes later, and vice versa.

ROTH IRAs and ROTH Conversions

Certainly, I’ll explain in simple terms.

When it comes to saving for retirement, you have a choice between contributing to a Roth IRA or a traditional IRA. It’s a bit like the game show “Deal or No Deal.”

  • Roth IRA: You contribute after-tax money, meaning you’ve already paid taxes on the income you put into the account. The advantage is that when you withdraw the money in retirement, it’s tax-free. So, you get to keep all the money in your “briefcase.”
  • Traditional IRA: Here, you contribute pre-tax money, which lowers your current taxable income. However, you’ll pay taxes when you withdraw the money in retirement. It’s like taking a deal where you might have to give a portion of your “briefcase” winnings to Uncle Sam later.

If you already have a large traditional IRA, you might wonder if it’s a good idea to convert it to a Roth IRA. This is a strategic decision. Converting means paying taxes on the amount you convert, but then your withdrawals in retirement will be tax-free.

The key is to think long-term, just like in the game show. You want to minimize what you pay in taxes now and maximize what you keep in your retirement “briefcase.”

Tax planning is essential, especially after finishing your taxes. But it’s crucial to consider the bigger picture. If you’ve saved a lot for retirement, not planning properly could mean paying more in taxes later.

In a nutshell, you should consider your current financial situation, your future income expectations, and your tax strategy to make the best choice between Roth and traditional IRAs and whether to convert existing accounts.

Taxes in Retirement

When you retire and no longer need all your retirement savings for income, you might leave it untouched, allowing it to continue growing. However, once you reach the age of 73, you’re required to take out more money from your retirement accounts, even if you don’t necessarily need it. This can result in higher taxes, including potentially hidden costs like increased Medicare premiums, which are based on your income.

Plus, we don’t even know what the tax rates are going to be at a later time.

Then, when your IRA passes to your beneficiaries unless it’s going to a charity, they are going to have to pay tax too.

Many times by choosing the least amount now, we’re making the most for Uncle Sam later.

So after your taxes are done, and we know where you’re at, we need to be looking ahead proactively.

What tax bracket are you in?

What is your income going to be like in the next year?

Can we look at maybe taking in converting some of your IRA money to a ROTH or a ROTH alternative creating a tax-free bucket, so that you’re not hit with higher taxes later? (Download our Tax Strategies for Retirement white paper to learn more about the different tax buckets.)

However, it is important to be sure all areas of your financial life are coordinated as there are other factors that go into whether we convert to a ROTH such as your retirement income plan. When and how to you plan on or need to access your accounts needs to be considered before any ROTH conversions.

Before you make a Deal, use a lifeline to talk it over with us!

We serve clients in Mineral Point WI, Dodgeville WI, Platteville WI, Lancaster WI, Fennimore WI, Boscobel WI, Richland Center WI, Muscoda WI, Spring Green WI, Mazomanie WI, Sauk City WI, Middleton WI, Madison WI, Fitchburg WI, Verona WI, Mount Horeb WI, Barneveld WI, New Glarus WI, Monroe WI, Belleville WI, Oregon WI, Stoughton WI, Darlington WI, Cuba City WI, Hazel Green WI, Belmont WI, Dubuque IA, Freeport IL


Want to share this blog post? Click the links below!

Register for Monthly Newsletter