To Roth Or Not To Roth, That Is The Question

The average American worker feels they need almost $1.5 million to retire comfortably, according to a survey by Northwestern Mutual, and at least one study says that here in Maryland, you need a minimum of $1.1 million. “How do I even save that much money?” is a common question I hear. Saving in IRAs is one way, but what is the right IRA?

Traditional IRA Vs. Roth IRA

A Roth IRA is an account where you contribute post-tax dollars toward your retirement. You pay taxes upfront, and funds can be withdrawn tax-free after age 59 and a half. Conversely, a traditional IRA allows you to contribute pre-tax funds that grow tax-deferred, but you must pay taxes upon withdrawing that money in retirement. “Do I want to pay taxes now or later?” That's just one of the many questions you need to ask yourself.

Should You Do A Roth Conversion?

If you have a traditional IRA, you can do what’s called a Roth conversion where you move assets from your traditional IRA to a Roth IRA. The consequence for doing that is the amount converted is taxable at your income-tax rate. If you know you’ll be in a higher tax bracket later in life, consider a Roth conversion now to avoid paying higher taxes later. Work with a tax professional who can help accurately project your tax situation in retirement. One common mistake is people thinking they’ll fall into a lower tax bracket in retirement.

Tax Changes Are Coming

The Tax Cuts And Jobs Act (TCJA) is set to expire at the end of 2025. When this happens, individual income tax rates will return to pre-TJCA levels, which were higher than they are now. Single tax filers who currently sit in the 24% bracket will get bumped up to the 28% bracket. A potential opportunity here is to take advantage of the TCJA before it expires and convert as much of your traditional IRA into a Roth as makes sense for you and your tax return. The goal doesn’t necessarily need to be converting every dollar of your traditional IRA. It’s a good idea to keep some money in a traditional IRA for income purposes. Determining the proper amount needed for income is best achieved working with a financial professional in determining your budget.

When the average American is thinking about needing $1.5 million to retire, what is hard to determine is what impact taxes are going to have on that figure. What we know for sure is it would be wonderful if that $1.5 million was a Roth and tax-free!

Risk Disclosure: Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Past performance does not guarantee future results. This material is for information purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. Please remember that converting an employer plan account to a Roth IRA is a taxable event. Increased taxable income from the Roth IRA conversion may have several consequences. Be sure to consult with a qualified tax advisor before making any decisions regarding your IRA.
The content is developed from sources believed to be providing accurate information; no warranty, expressed or implied, is made regarding accuracy, adequacy, completeness, legality, reliability or usefulness of any information. Consult your financial professional before making any investment decision. For illustrative use only.

Jason LaBarge, financial advisor and president of LaBarge Financial
7 Riggs Avenue, Severna Park, MD 21146 443-647-4321
www.labargefinancial.com

Securities offered only by duly registered individuals through Madison Avenue Securities LLC (MAS), member FINRA/SIPC. Investment advisory products and services made available through AE Wealth Management LLC (AEWM), a registered investment advisor. MAS and LaBarge Financial are not affiliated entities. 2399742-05/24