Tag: tax bill

Ask an Advisor: I Want to Roll Over My Money to a Roth IRA. How Do I Avoid Paying Taxes?
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Ask an Advisor: If I Have a Tax-Deferred 401(K). Can I Convert It to a Roth IRA Without Paying the Deferred Taxes When I Roll It Over?

If I have a tax-deferred 401(k). Can I convert it to a Roth IRA without paying the deferred taxes when I roll it over?

-Tommy

Generally, the answer here is no. There’s typically no method to totally dodge taxes on a Roth conversion. Eventually, Uncle Sam will come to collect on your tax-deferred retirement accounts – either when you execute a Roth conversion, withdraw funds or collect your required minimum distributions (RMDs).

That said, your inability to totally dodge taxes doesn’t translate to an inability to reduce them. Here are some savvy strategies to reduce your tax bill on a Roth conversion. (For more information on taxes and retirement, consider working with a financial advisor.)

Strategies to Reduce Your Tax Bill on a Roth Conversion

Ask an Advisor: If I Have a Tax-Deferred 401(K). Can I Convert It to a Roth IRA Without Paying the Deferred Taxes When I Roll It Over?

To reduce the tax consequences of rolling a tax-deferred account to a Roth, consider these methods:

Execute a Tax-Aware Partial Roth Conversion

One strategy for reducing the tax liability of a Roth conversion involves spacing out your rollovers over several years. To use this strategy, convert just enough to push your total income to the limits of your current tax bracket without entering the next bracket up. (For more information on taxes and retirement, consider working with a financial advisor.)

If you’re ready to be matched with local advisors that can help you achieve your financial goals, get started now.

Roll Over Your Money in a Low-Tax Year

For many folks, a prime time for Roth conversions takes place during the years after retirement but before Social Security and RMDs kick in. Those can be relatively low-income years during which initiating a conversion can result in a triple benefit. Those benefits are: lower tax bills, reduced RMDs and future tax-free growth.

Speaking of timing, if you suspect tax rates will increase at the anticipated sunset of the Tax Cuts and Jobs Act or due to political machinations on Capitol Hill, making a Roth conversion now can be an option.

You’ll lock in your current tax rate and hopefully ride out any future increases. Keep in mind that nobody has a crystal ball, and this strategy involves making predictions about the future. (For more information on how tax policy may impact retirement planning, consider working with a financial advisor.)

Pay the Tax Wisely

Many experts recommend paying the tax on your Roth conversion with nonretirement assets. That’s opposed to withholding some of your retirement funds to pay the bill. This will allow you to move the greatest amount into your new Roth account and continue to watch it grow tax-free.

Work With a Financial Advisor

A financial advisor may be able to help you take a holistic look at your tax and retirement profile, identifying opportunities to minimize taxes while adhering to an investment philosophy that matches your life stage.

A good advisor can talk you through whether a Roth conversion makes sense right now. He or she can also discuss alternatives, such as converting your 401(k) into a traditional IRA, transitioning to a new employer’s 401(k) or making a partial conversion.

Tips for Handling Taxes in Retirement
- Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Consider a few advisors before settling on one. It’s important to make sure you find someone you trust to manage your money. As you consider your options, these are the questions you should ask an advisor to ensure you make the right choice.
Susannah Snider, CFP® is SmartAsset’s financial planning columnist and answers reader questions on personal finance topics. Got a question you’d like answered? Email AskAnAdvisor@smartasset.com and your question may be answered in a future column.

Please note that Susannah is not a participant in the SmartAdvisor Match platform and is an employee of SmartAsset.

Photo credit: ©Jen Barker Worley, ©iStockPhoto/AndreyPopov

The post Ask an Advisor: I Want to Roll Over My Money to a Roth IRA. How Do I Avoid Paying Taxes? appeared first on SmartAsset Blog.
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December 28, 2023
A War on Blue America

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During his term in the White House, Donald Trump governed as a wartime president—with blue America, rather than any foreign country, as the adversary. He sought to use national authority to achieve factional ends—to impose the priorities of red America onto Democratic-leaning states and cities. The agenda Trump has laid out for a second term makes clear that those bruising and divisive efforts were only preliminary skirmishes.

Explore the January/February 2024 Issue

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Presidents always pursue policies that reflect the priorities of the voters and regions that supported them. But Trump moved in especially aggressive ways to exert control over, or punish, the jurisdictions that resisted him. His 2017 tax bill, otherwise a windfall for taxpayers in the upper brackets, capped the federal deductibility of state and local taxes, a costly shift for wealthy residents of liberal states such as New York and California. He moved, with mixed success, to deny federal law-enforcement grants to so-called sanctuary cities that didn’t fully cooperate with federal immigration agents. He attempted to strip California of the authority it has wielded since the early 1970s to set its own, more stringent pollution standards.

Read: Trump’s war on blue America

In Trump’s final year in office, he opened a new, more ominous front in his campaign to assert control over blue jurisdictions. As the nation faced the twin shocks of the coronavirus pandemic and the protests that followed the murder of George Floyd, Trump repeatedly dispatched federal law-enforcement agents to blue cities, usually over the opposition of Democratic mayors, governors, or both. Trump sent an array of federal personnel to Portland, Oregon, ostensibly to protect a federal courthouse amid the city’s chaotic protests; reports soon emerged of camouflage-clad federal agents without any identifying insignia forcing protesters into unmarked vans. Trump responded to the huge racial-justice protests in Washington, D.C., by dispatching National Guard troops drawn from 11 states, almost all of them led by Republican governors. Later he sent other federal law-enforcement officers to combat rising crime in Kansas City and Chicago, a city Trump described as “worse than Afghanistan.”

Trump has signaled that in a second presidential term, he would further escalate his war on blue America. He’s again promising federal legislation that would impose policies popular in red states onto the blue states that have rejected them. He has pledged to withhold federal funding from schools teaching critical race theory and “gender ideology.” He says he will initiate federal civil-rights investigations into liberal big-city prosecutors (whom he calls “Marxist local District Attorneys”) and require cities to adopt policing policies favored by conservatives, such as stop-and-frisk, as a condition for receiving federal grants.

Even more dramatic are Trump’s open pledges to launch militarized law-enforcement campaigns inside blue cities. He has proposed initiatives that cumulatively could create an occupying federal force in the nation’s largest cities. Trump has indicated that “in cities where there’s been a complete breakdown of public safety, I will send in federal assets, including the National Guard, until law and order is restored.”

Read: Why the 2020s could be as dangerous as the 1850s

Trump envisions an even more invasive door-to-door offensive against undocumented immigrants. In an early-2023 speech at the Conservative Political Action Conference, Trump said he “will use all necessary state, local, federal, and military resources to carry out the largest domestic deportation operation in American history.” Stephen Miller, who was his top immigration aide in the White House, later added that Trump envisions establishing massive internment camps for undocumented immigrants awaiting deportation. Trump has also promised “to use every tool, lever, and authority to get the homeless off our streets,” and move them to camps as well. (On this front, Trump has said he would work with states, but in practice that would likely involve partnering with Republican governors to impose policies to clear the streets opposed by their own Democratic mayors.)

Michael Nutter, a former mayor of Philadelphia, told me that if a reelected Trump sought to implement these policies, the result would be “chaos, confusion,” and “massive demonstrations.” “Nobody is going to allow that to just happen,” Nutter said. “You are just going to see standoffs. It is going to be the Philadelphia Police Department versus the National Guard. Neighbors are going to be surrounding people’s houses. Folks are going to rush and seek safety in churches and synagogues and mosques and temples.”

Of course, Trump would face other obstacles in attempting to implement these plans. The president’s legal authority to deploy federal forces over the objections of local officials is murky. And the relatively small number of federal law-enforcement officers under his direct control at agencies such as U.S. Immigration and Customs Enforcement and Customs and Border Protection could limit his options, according to Richard Briffault, a professor at Columbia University Law School who studies relations among cities, states, and the federal government.

But in Trump’s final months in office, he got creative about augmenting the forces at his command by drawing on National Guard troops provided by sympathetic Republican governors. His advisers are already talking about doing the same to staff his deportation agenda, as well as using the emergency authority he cited to fund his border wall to build his camps for undocumented immigrants without congressional approval.

Briffault told me that the inevitable court challenges to any Trump-ordered projections of force into blue cities would likely pivot on the courts’ interpretation of how much authority the president possesses under various emergency statutes. His advisers have already discussed invoking the 19th-century Insurrection Act, for example. As legal scholars have pointed out, the scope of the president’s emergency powers is much broader than most Americans recognize, and Trump is clearly signaling that if he returns to the White House, he intends to test the outer boundaries of that authority. The question for the courts will be “to what extent can he engage directly in law enforcement and having militarized law enforcement in the United States, in the absence of a request by a governor or a mayor that there is a riotlike condition or civil disorder?” Briffault said. “Can he declare an emergency even though he’s not being asked for it?”

From the January/February 2022 issue: Barton Gellman on how Trump’s next coup has already begun

As president, Trump seemed to view himself less as the leader of a unified republic than as the champion of a red nation within a nation—one that constitutes the real America. If anything, Trump has assumed that factional role even more overtly in his 2024 campaign, promising that he will deliver “retribution” for his supporters and dehumanizing his opponents. Powered by such fetid resentments and grievances, the agenda Trump seeks to impose on blue cities and states could create the greatest threat to the nation’s cohesion since the Civil War.

This article appears in the January/February 2024 print edition with the headline “A War on Blue America.”

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December 7, 2023
6 Strategies to Help Lower RMD Taxes
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Individual Retirement Accounts (IRAs), 401(k)s and other workplace plans can help you build wealth for the future while enjoying some tax benefits.

There’s just one important thing you need to plan for: required minimum distributions (RMDs). The IRS requires you to begin taking distributions from certain retirement accounts in the year you turn 73.

If not properly planned for, these distributions could take a tax toll on your retirement nest egg. Applying some smart RMD strategies could help reduce distributions and potentially lower your tax bill.

Consulting a fiduciary financial advisor can be a great first step to factoring RMDs, and the potential tax repercussions, into your retirement plan. That’s why we created a free tool to help match you with up to three financial advisors.

Click here to take our quick retirement quiz and get matched with vetted advisors in just a few minutes, each obligated to work in your best interest.

Research suggests people who work with a financial advisor feel more at ease about their finances and could end up with about 15% more money to spend in retirement.¹

A 2022 Northwestern Mutual study found that 62% of U.S. adults admit their financial planning needs improvement. However, only 35% of Americans work with a financial advisor.²

What Are RMDs?

RMDs are amounts you’re obligated to withdraw from certain tax-advantaged retirement plans, including:

Roth IRAs don’t have RMDs, so you can leave money in those accounts as long as you live. While Roth IRAs do not have RMDs for the original account holder, beneficiaries who inherit a Roth account may be subject to RMDs.

When Do RMDs Kick In?

Generally, RMDs begin at age 72. More specifically, the IRS says you must start taking them by your required begin date (RBD). The required begin date is April 1 of the year following the year in which you turn 72. So if you turn 72 on Oct. 5, then your RMDs must begin starting on April 1 of the next calendar year.

The amount you’re required to withdraw is based on your account balance and life expectancy (according to IRS tables). Withdrawals are taxed at your ordinary income tax rate. Failing to take RMDs on schedule can result in a 50% tax penalty.

6 Strategies to Reduce RMD Taxes

Taking RMDs can be problematic from a tax perspective. If you have large balances in your IRAs or workplace retirement accounts, taking RMDs could inflate your tax bill. That’s where it can be helpful to have a few RMD strategies in your back pocket to try and reduce what you owe.

Here are six common ways to potentially shrink your RMDs in order to minimize taxes:

1. Draw Down Your Account Early

Once you turn 59 ½, you can begin taking money from retirement accounts without a tax penalty. Taking larger distributions in the early years of your retirement can reduce your overall account balance, lowering your RMDs later. This option could make sense if you expect to be in a lower tax bracket when you retire.

Drawing down your retirement accounts before age 72 can offer another benefit. You may be able to delay taking Social Security benefits. The longer you delay benefits beyond your full retirement age, the more your benefit amount increases. If you can wait until age 70, for example, you’ll receive 132% of your benefit amount.

2. Consider a Roth IRA Conversion

Roth IRAs offer the benefit of 100% tax-free qualified withdrawals – and they don’t have RMDs. If you’d like to avoid RMDs, you could convert your traditional retirement funds to a Roth account. You’ll have to pay tax on the conversion in the year it occurs. But it may be worth it to take a one-time tax bill hit in order to avoid RMDs and withdraw remaining retirement funds tax-free.

While converting traditional retirement funds to a Roth account may be an option to consider for avoiding RMDs, it is not guaranteed to be worth it for everyone. Tax implications should be carefully considered and consulted with a tax professional. A financial advisor could help determine if this could be a viable strategy for you. This free quiz can match you with up to three advisors who serve your area.

3. Work Longer

If you have some of your retirement funds in your current employer’s 401(k), you might consider working longer to avoid RMDs. As long as you’re still working in some capacity, you’re not required to take minimum distributions from a workplace plan where you’re still employed.

That exception doesn’t apply to retirement accounts you had with previous employers. You won’t get a pass on IRA RMDs either. But continuing to work could help to reduce the total amount of RMDs you need to take once you turn 72. And again, you can delay Social Security benefits as well.

4. Donate to Charity

One of the most popular RMD strategies for reducing taxes involves donating the amount to charity. The IRS allows you to donate up to $100,000 a year from an IRA without having to pay income tax. The money you withdraw will still count toward your RMD so you don’t have to worry about a 50% tax penalty for failing to take distributions.

There are a few rules for this strategy:
- You can only donate up to $100,000 to a qualified charity
- Your IRA custodian must arrange for the transfer of funds to an eligible charity
- You’re not allowed to claim the donation as a charitable deduction your taxes
5. Consider a Qualified Longevity Annuity Contract

A qualified longevity annuity contract (QLAC) is a type of deferred annuity contract. You can use your retirement funds to purchase the annuity, then receive payments back at a later date. Payments are required beginning at age 85 and any money you put into the annuity does not factor into your RMD calculations.

However, you can only put so much money into a QLAC – up to $200,000. While you can defer taking payments until age 85, you can’t avoid them indefinitely.

6. Check Your Beneficiaries

If you’re at least 10 years older than your spouse and name them as the sole beneficiary of your retirement account, you can use the IRS Joint Life and Last Survivor Expectancy Table to calculate RMDs.

This strategy allows you to use your spouse’s longer life expectancy to determine how much to withdraw, which can lower the amount. Of course, if your spouse is closer to your own age or you have multiple beneficiaries, you wouldn’t be able to use this RMD strategy.

Where to Look for RMD Advice

Applying RMD strategies can be a simple way to reduce what you owe in taxes during retirement. You can use just one strategy or apply several in order to bring down your tax bill. While these strategies can help reduce RMDs, there’s no way to avoid RMDs indefinitely (unless you have a Roth IRA).

Consulting a fiduciary financial advisor could help you determine a plan that factors RMD taxes into your overall retirement goals. Fiduciaries are obligated by law to act in your best interest as they manage your assets or money, and any potential conflicts of interest must be disclosed.

Yet knowing how to find a vetted fiduciary advisor is, for many, the most confusing task of all. Common Google searches related to the topic reveal a desperate search for direction. “Fiduciary financial advisors near me,” “best fiduciary financial advisor,” and “financial investment advisors near me” are searched for hundreds of times per day.

Finding a fiduciary shouldn’t be that hard. Thankfully, now it isn’t.

Our free matching quiz helps Americans get matched with up to three fiduciary advisors who serve their area so they can compare and decide which advisor to work with. All advisors on the matching platform have been rigorously vetted through our proprietary due diligence process.

The quiz takes just a few minutes, and in many cases, you can be connected instantly with an advisor to interview.

Sources:
1. “Journal of Retirement Study Winter” (2020). The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of your future results. Please follow the link to see the methodologies employed in the Journal of Retirement study.
2. “Planning and Progress”, Northwestern Mutual (2022)
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November 5, 2023