There is story after story about people who come into a bunch of money.
Where problems can arise is when they don’t know what to do with it, they don’t understand the concept of money, and they don’t know how much they can safely spend. Simply put, there is no plan in place other than receiving the money and start spending.
When you’re working you have a paycheck that comes in every month. Taxes are already withheld, money has gone into your 401(k), and you know how much you can spend. When you get into retirement, maybe you have money in an IRA, Roth IRA, inherited IRA, or an already taxed account. The question is, how much can you safely spend after taxes have been paid and ensure you that you don’t run out of money? That’s the big question and what most people want answered.
One of the ways that we have found that you can spend more money in retirement is by reducing that tax burden. It has nothing to do with investments, it’s just reducing the tax burden. In order to do that you have to understand the immense tax code and the section covering IRAs and 401(k)s.
“A lot of times people read something and they are like, ‘I’m going to do this Roth Conversion!’ as if it’s going to be a magic cure-all and all of the sudden their retirement is going to be fabulous, but it’s a lot more complicated than that.” – JoAnn Huber, CFP®, CPA
A method that we see that may be a good idea to use in some situations, but not every situation, is converting money after retirement from a Traditional IRA to a Roth IRA. People talk about that Roth Conversion strategy, but yet we still see people making mistakes with that method before they come in and put together their financial plan. They just think, “Well, I read somewhere that taking my money out of the traditional and putting it in the Roth was a good idea, so I just did it.” What they may not have considered is what is the right amount to convert? Do you do it all at once? Do you spread it out over a number of years?
According to JoAnn Huber, Partner, CFP®, CPA, “There’s so many factors to look at with conversions. You know, a lot of times people read something and they are like, ‘I’m going to do this Roth Conversion!’ as if it’s going to be a magic cure-all and all of the sudden their retirement is going to be fabulous, but it’s a lot more complicated than that. You have to consider how it fits into your overall financial plan.”
Another significant factor in conversions is the window of opportunity, because by the time you turn 70 ½ that window is almost closed from the stand point that you must begin taking RMDs (require minimum distributions) and if you haven’t done any conversions prior to that then all that money that is taxable will continue to be taxable.
JoAnn continues, “I think we’re in a situation this year with the changes in the tax law where we have the lower tax rate, that even some people that are over age 70 ½, it may make sense to do Roth Conversions.”
Point is, IRA conversions are complicated and can affect your entire plan if you don’t make sure the conversion works for your plan. This weekend on America’s Wealth Management Show, Dean, Bud, and JoAnn take a deep dive into IRAs. Don’t miss it this Saturday, November 17th 11:00am to Noon on 98.1FM KMBZ.
If you’re thinking about your IRA and aren’t sure what your next step is, we’re here to help! Our financial advisors and CPAs in Kansas City can break-down your plan and help guide you in the right direction with your IRA, no cost and no-obligation. Fill out the form below or give our office in Lenexa a call, at 913-393-1000.
Investment advisory services offered through Barber Financial Group, Inc., an SEC Registered Investment Adviser.
The views expressed represent the opinion of Barber Financial Group an SEC Registered Investment Advisor. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Barber Financial Group does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.