by Jeremy A. Wechsler
Investment Advisor Representative
[email protected]
You heard it here a couple of weeks ago—I am the newest member of FRS, and I am beyond thrilled to join the team here. They even gave me a couple of titles—Advisor and Recovering Attorney. My dad, Peter, co-founded FRS when I was in college, so I have watched him grow this business for my entire adult life. Much has changed in all of those years, but the consistent thread that I have witnessed up close is his dedication to this business and to our clients.
As you know, this newsletter regularly chronicles the travels of my dad. Following in his footsteps, I’ve been traveling quite a bit myself. My most recent stop was in Orlando, Florida, where I attended Ed Slott’s two-day IRA Workshop. Sounds thrilling, doesn’t it?
But in all seriousness, the workshop was packed with great information, and I had a few takeaways that I wanted to share with you that touch on tax-free savings accounts, better known as Roth IRAs.
- Why convert to a Roth IRA? There are several reasons, but tax concerns and legacy planning are the two that stand out the most. On taxes, the U.S. National Debt currently stands at $36 trillion—yes, trillion. Unsurprisingly, this number continues to rapidly rise. The check will come due at some point, and it is difficult to imagine taxes not increasing. If you convert your taxable account to a tax-free account, you gain more control and a hedge against future (higher) taxes. Otherwise, Uncle Sam will remain by your side, waiting for his (larger) cut.
- Legacy Planning: Roth IRAs are a key legacy building tool. You can leave your loved ones and heirs with tax-free dollars, that (for most beneficiaries) continue to grow tax-free for 10 years after your passing. Again, assume taxes will be higher in the future. Why not pay the lower tax now? The sooner you convert, the more tax-free growth both you and your heirs will receive, perhaps creating a multi-generational legacy. It hurts to pay the tax now, but understand that the tax will be paid at some point, and better to do it at a lower rate than a higher rate.
- Young Professionals: (Hint—Pass this info onto your kids!) Roth IRA Conversions are not only for those who are close to or at retirement—younger professionals can benefit greatly from a Roth. First, taxes are likely to increase in the future, so the bill to convert will probably be higher. Second, the money you save today will appreciate in value, with more taxes owed on that appreciation at a later conversion. Why not convert it sooner? Also, and before I run out of space… stop contributing to a 401(k) if your employer has a Roth 401(k) option!
Roth Conversions do not make sense for everyone, but they’re worth exploring. Other options for strategic tax planning around IRAs exist as well—the use of life insurance and charitable trusts are just a couple of options.
I could go on and on about this topic—it is the perfect intersection between estate planning, tax planning and financial planning. Need some help with the pros and cons of conversions and other planning opportunities? Get in touch with us!