08/19/2012

MANAGING Your Retirement Income

Roth IRA Conversion and Other Income Tax Planning Strategies

While income portfolio strategies are the primary retirement income management strategies that we use at Retirement Income Center to service our clients' retirement income planning needs, they aren't the only ones. It's a well known fact that the amount and longevity of retirement income streams can be enhanced through the use of income tax planning strategies. 

At Retirement Income Center, we're fortunate to be able to rely on the income tax planning expertise of Robert Klein. In addition to his other professional designations, credentials, and degrees, Bob has been a CPA since 1982 and he also has a M.S. in Taxation (MST) from Golden Gate University. Through his sole proprietorship, Robert Klein, CPA, Bob does income tax planning and income tax preparation for individual, business, and fiduciary clients, many of whom are also clients of Retirement Income Center.   

Roth IRA Conversion Planning

One important strategy that we recommend to our clients to increase their retirement income opportunities when appropriate is the Roth IRA conversion.

Although Roth IRA's and Roth IRA conversions have been around since 1998, it wasn't until the $100,000 modified adjusted gross income threshold was eliminated beginning in 2010 that the Roth IRA conversion technique became available to anyone with a traditional IRA.

A Roth IRA conversion offers the following three primary advantages compared to traditional IRA's when it comes to increasing the amount and longevity of retirement income streams:

  • No income tax liability on appreciation of Roth IRA conversion amounts
  • No required minimum distributions ("RMD's")
  • Potential reduction of taxable Social Security benefits

No Income Tax Liability on Appreciation of Roth IRA Conversion Amounts

Whenever a deduction is allowed for contributions to a retiement plan, whether it be an IRA, 401(k), or some other type of pension plan, withdrawals from the plan are taxable as ordinary income just like salary. Since contributions to a Roth IRA aren't deductible, withdrawals, including appreciation on conversion amounts, with limited exceptions, generally aren't taxable.

No Required Minimum Distributions ("RMD's")

Whereas contributions to traditional IRA's are potentially deductible and IRA accounts enjoy tax-deferred growth until you begin taking withdrawals from them, IRS doesn't allow this to continue indefintely. Once you turn 70-1/2, you must begin taking required minimum distributions, or "RMD's," from your traditional IRA based on the value of your IRA accounts at the end of the previous year using a life expectancy factor from an IRS table. A 50% penalty is assessed on the amount of any RMD's not withdrawn.

See Robert Klein's article, RMD:  A Sensible Systematic Withdrawal Plan, that was published in The Wall Street Journal on April 17, 2013.

Roth IRA's aren't subject to the RMD rules during the owner's lifetime. You can convert 100% of a traditional IRA to a Roth IRA at age 25 and not take any distributions from the Roth IRA  account for the duration of your life without being exposed to any penalties. It should be noted, however, that if you inherit a Roth IRA account, you will be required to take minimum distributions from it.

Potential Reduction of Taxable Social Security Benefits

In addition to elimination of income tax liability on appreciation of Roth IRA conversion amounts as well as RMD compliance, a third advantage of Roth IRA conversions that will result in increased amount and longevity of retirement income streams is a potential reduction of taxable Social Security benefits.

To learn more about this innovative tax planning technique, please read Retirement Income VisionsTM March 15, 2010 post, Want to Reduce Taxable Social Security Benefits? Consider a Roth IRA Conversion.

Robert Klein has written extensively about the use of Roth IRA conversions as a retirement income planning strategy. To learn more, please read all of Retirement Income VisionsTM posts on this subject beginning with the January 11, 2010 post, Year of the Conversion, through the May 9, 2011 post, Roth IRA Conversion Insights - Part 2 of 2.

Other Income Tax Planning Strategies

Retirement Income Center employs a number of other income tax planning strategies to increase the amount and longevity of its clients' retirement income streams. These strategies include those specific to asset management as well as other non-income and non-asset management strategies that are appropriate for, and customized to, a particular client's planning needs.

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