Seizing Opportunities: Leveraging Roth Conversions During Lower Income Windows

If you have ever found yourself in a year with lower-than-usual income – perhaps due to a career change, sabbatical, or other life circumstances – you may be sitting on a golden opportunity to enhance your retirement savings and potentially reduce future tax liabilities. Often, the first years of retirement create a “low tax environment” where earned income, Social Security and Required Minimum Distributions (RMDs) are absent. Many new retirees start the first few years of retirement using savings as a source of income. By using savings, taxable income often takes a sudden and sharp move downward. For higher income earners, these lower income periods should be utilized for greater opportunity! Let's explore some ways we have assisted high-income and high-net-worth individuals by capitalizing on these low-income periods with a Traditional IRA to Roth IRA conversion and unlocking some tax advantage strategies.

The Power of Roth Conversions

Before we dive into the specifics, let's quickly recap why Roth IRAs are such a game-changer for retirement savings. Unlike Traditional IRAs or Traditional 401(k)s, Roth IRAs can offer tax-free growth and tax-free withdrawals in retirement. This means that any contributions you make to a Roth IRA, as well as the investment gains, can likely be withdrawn, without incurring taxes down the road. It's a powerful wealth-building tool that can boost your retirement savings and potentially provide valuable tax reductions for your investment portfolio.

Spotlight on Lower Income Windows

Now, let's talk about those lower income windows. Whether it is a year of reduced work hours, a gap year between jobs, a year or two where you are living on your savings or a period of self-employment with fluctuating income, these windows often present a unique opportunity for investors. Why? Because during these years, your taxable income should be low, allowing for a Roth IRA conversion where low tax rates might prove the conversion taxes very affordable. And that's where the magic happens!

Strategic Roth Conversions: A Step-by-Step Guide

At ClearPlan Wealth Management, we can help you take advantage of these lower income windows to convert a Traditional IRA to a Roth IRA and reap the benefits:

• Assessing your Tax picture: As many people enter retirement, they may suddenly realize a reduction of income. Don’t panic! This could be a wonderful opportunity! Many retirees experience a change to cover monthly expenses and move from living off income to living off savings. This change typically results in a reduction of tax liability.
• Taking Advantage of a drop in income: Often referred to as the “Early Retirement Sweet Spot”, this sudden drop in tax liability is an opportunity to convert Traditional IRA assets to a Roth IRA while maintaining a steady tax profile. In short, as income drops, so does “Income Tax”. This is an opportunity to replace “Income Tax” with “Tax from a Roth Conversion”. Because Roth conversions are taxed as ordinary income in the year of conversion, doing so when your income is lower can potentially reduce future tax impact.
• Maximize a Tax Efficient Retirement: At ClearPlan Wealth Management, we team with you and your tax advisor to develop a detailed strategy and help evaluate the tax implications of your retirement. This assessment often involves discussions about your current income, deductions, and other financial factors. By strategically timing your conversions during lower income years, you can minimize the tax liability and maximize the benefits of tax-free growth.

Unlocking Tax-Free Wealth: The Bottom Line

In summary, Roth conversions during lower income windows offer a strategic opportunity for investors to bolster their retirement savings and minimize their future tax burden. Capitalizing on years when your income falls may be an opportunity to convert funds from traditional retirement accounts without increasing your current-year tax liability. It's a savvy strategy that can help turbocharge your retirement savings and pave the way for a more tax-efficient financial future.

Caution:. A tax-free conversion only works if the IRA owner does not hold pre-tax funds in ANY IRA for the year of the conversion. If you own an existing Traditional IRA that holds pre-tax funds or multiple IRAs and one or more IRAs hold pre-tax funds, then the IRA contribution amount converted is subject to the IRS pro-rata rules for conversions. Please be sure to review this conversion strategy with your tax advisor or certified public accountant (CPA).

Is Your Financial Advisor Proactive?

Has your financial advisor discussed Roth IRA conversion options with you? If not--why not? We find having a proactive conversation allows us to advise you more effectively, helping you to plan ahead for the best financial position possible for you and your loved ones.

As with any financial strategy, it is crucial to consult with a qualified financial advisor and/or tax professional before implementing Roth conversions or making significant changes to your retirement plan. We help our clients by assessing individual circumstances and working in conjunction with your tax advisor to develop a personalized strategy that better aligns with your long-term financial goals.

So, if you find yourself in a lower income window – whether by choice or circumstance – do not overlook the possible benefits of Roth IRA conversions. Seize the opportunity to potentially maximize your retirement savings, minimize your tax burden, and set yourself on the path to financial freedom.

With careful planning and strategic execution, we can help you unlock the benefit of tax-free wealth accumulation and build a brighter financial future for yourself and your loved ones.

Would you like more information? At ClearPlan Wealth Management, we provide a holistic approach to financial planning by listening, offering guidance, and engaging valued resources to consider every aspect of your life and your desired legacy. Contact us today to start the conversation.

Unless certain criteria are met, ROTH IRA owners must be 59 ½ or older and have held the IRA for five years before tax-free withdrawals are permitted. Additionally, each converted amount may be subject to its own five-year holding period. Converting a traditional IRA into a ROTH IRA has tax implications. Investors should consult a tax advisor before deciding to do a conversion. Opinions expressed in the attached article are those of ClearPlan Wealth Management and not necessarily those of Raymond James. All opinions are as of this date and are subject to change without notice. Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification and asset allocation. Prior to making an investment decision, please consult with your financial advisor about your individual situation.