Enhance your retirement with a Roth IRA

Tax-free earnings is an obvious advantage of a Roth IRA. You may roll over money from your 401K plan or other tax-deferred retirement account to a Roth IRA, but be aware that you have to pay income tax on money you roll over from your tax-deferred account. Conventional wisdom is to wait until retirement to pay that tax as you may be in a lower tax bracket, but you should think about moving some of your retirement money into a Roth IRA before you retire for these reasons;

  1. Tax rates may increase in the future, so you could be paying more tax than you would have if you rolled over retirement money earlier.

  2. When you begin drawing Social Security, you may pay less tax on your benefits. Traditional retirement account withdrawals are considered income when determining the percentage of your Social Security benefits that are taxed. Roth IRA withdrawals are not part of your taxable income and do not count toward SS benefits taxation.

  3. In Arkansas the first $6,000 you take from your traditional retirement account is state tax free - your adjusted gross income for Arkansas tax is reduced by up to $6,000. By moving some of your money to a Roth IRA each year prior to retirement, you can enjoy many years of reduced Arkansas taxes. Other states may have similar deductions.

  4. During a market slump when your retirement fund has taken a loss - let's say your retirement account is down by 20% when you roll part of it into a Roth IRA. You have to pay taxes on the amount you roll over, but when the market recovers you will have paid only 80% of the taxes that you would have paid in normal times, and you will pay no tax on the increase in value or future earnings.

  5. If your income decreases enough to put you in a lower tax bracket, you pay less tax on the rollover amount that year.

After age 59 and a half, you pay no tax or penalty on withdrawals from your Roth IRA so long as the money has been in the account for at least 5 years.

Investopedia has a good article on how to do a Roth IRA rollover including the pros and cons. There is no limit to how much you can roll over from your retirement account, but you will not want to roll over more money than you can pay tax on. Also, to avoid an underpayment penalty, you may need to increase your payroll tax deductions.

Withdrawal rules and early withdrawal penalties by H&R block. You may roll over money from your retirement account into a Roth IRA at any age, but if you are younger than 59 and a half, do not take money from your retirement account to pay the tax.

You may want to keep some money in your IRA because you may be able to avoid paying tax on some of it. Certain contributions made through "qualified charitable distributions" - funds sent directly to the charity from a traditional IRA - are excluded from your taxable income. If your age requires you to take annual required minimum distributions, RMD, from your IRA, you could reduce your tax liability on the RMD to zero. If your RMD is $3,000, but you give $3,000 to charity anyway, do the qualified charitable distribution and you donít pay any tax on the RMD. That money is not included in your adjusted gross income (AGI).

There are also a few other ways that people at any age may might qualify for reduced taxes on IRA distributions.

If you cannot afford to pay taxes on your retirement roll over, and if you participate in your company's stock purchase plan, consider cashing out some of that money when the stock price is high. You can set that money aside or put it in a fixed income fund until you need it to pay the tax on the roll over into your Roth IRA.

Hopefully this info will be a good starting place for research and planning in order to maximize your retirement savings. Please consult your tax adviser or accountant prior to acting on any of these recommendations.

Charles Young wrote this in an effort to offer some quick and simple advice. God bless.

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