July 25, 2022

Have you seen your recent statement? I have. I know you’re not particularly happy seeing losses, and neither am I. If you work with an Advisor or have been investing for long enough, you may understand that the market ebbs and flows.

The media has focused on the negatives for more than 6 months now, but today we will focus on an opportunity you can take advantage of during a market downturn.

Diamonds… What Diamonds?

For some of us, now may be a good time to look into a Roth Conversion.

A Roth conversion is this:

You have 2 buckets of money. One is labeled “Pre-Tax”, and one is labeled “After Tax.” The pre-tax bucket holds all your IRAs, 401ks, 403bs, etc. You decide to pay taxes on the pre-tax money today to put it into the after-tax bucket. The after-tax bucket I am referring to is a Roth IRA.

What’s the point? Why now?

In a Traditional IRA, contributions are often made with pre-tax dollars. Once reaching age 59 ½, you can withdraw money penalty free. These withdrawals are taxable as ordinary income and have the potential to increase your tax bracket in retirement. Once you reach age 72, you are required to begin withdrawing money—referred to as a Required Minimum Distribution or RMD

A Roth IRA has more favorable long-term features. Contributions are made with after-tax dollars, which means your withdrawals are completely tax free regardless of how much money you make. Additionally, you aren’t required to take RMDs like you are in a Traditional IRA. Because you aren’t depleting your account every year, your money will be able to grow more efficiently after age 72.

As I said before, we’re all aware that the market is down. When the value of assets in your IRA fall, so does the amount of tax that you will have to pay to convert it. You’re essentially paying tax on a lower number. This gives us a greater potential for tax free growth once the value of our investments rises again.

This strategy can be implemented by people who have IRAs, 401ks and other retirement accounts from previous employers, and by some who are over 59 ½ and are eligible for an In-Service Distribution from their active 401k.

Many investors who have an income above the contribution limit for both Roth and Traditional IRAs can implement this strategy as well to have some assets tax free in retirement.

If need help with your Roth conversion, or are wondering if it is suitable for you, please feel free to reach out!

Brighton Securities' Financial Advisor Patrick Cicchetti