Financial advisers consistently caution savers about the dangers of stockpiling too much of their retirement money in tax-deferred investment plans. Do a quick online search of the term “ticking tax time bomb,” and you’ll see that advice goes back at least a decade.
What Retirement Savers May Want to Consider Doing Now
If that isn’t incentive enough to reposition a portion of your nest egg ASAP, I’m not sure what is. Alternatively, consider:
- Contributing to a Roth instead of a tax-deductible retirement account for married couples with incomes of up to $339,000 who are using the $24,000 standard deduction (putting them at the upper limit of the 24% tax bracket). Couples with incomes above $339,000 should have a tax professional run the numbers.
- Contributing to regular tax-deductible retirement accounts and using the “backdoor Roth” strategy to convert to a Roth. Note that there are additional restrictions to consider before implementing this strategy.
- Rolling over tax-deductible accounts into a Roth. In my opinion, this should be spread over a maximum of the next eight tax return years up to at least your 24% tax bracket.
- With the use of professional advice from a CFP® or other qualified financial planner and a qualified tax adviser, starting a maximum seven-year life insurance contribution plan. This plan should meet all the IRS MEC avoidance guidelines with maximum contributions and minimum death benefits with the potential for tax-free income via policy loans starting in year eight or later.
You can wait until 2025, when the new tax rates are set to expire. (Although, if there’s a change in administration, that window could grow smaller.) Or you could make things a bit easier on your pocketbook and convert a little each year for the next few years. But now is the time to talk to your financial adviser and tax accountant about what converting tax-deferred dollars to after-tax dollars could mean to you.
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Kim Franke-Folstad contributed to this article.
It's important to remember that most life insurance policies are subject to medical underwriting, and in some cases, financial underwriting, and the costs of a life insurance policy is dependent on your age and health at the time of application. Life insurance products contain fees, such as mortality and expense charges, and may contain restrictions, such as surrender charges. If properly structured, proceeds from life insurance are generally income tax-free.
Policy loans and withdrawals will reduce available cash values and death benefits and may cause the policy to lapse, or affect guarantees against lapse. Additional premium payments may be required to keep the policy in force. In the event of a lapse, outstanding policy loans in excess of unrecovered cost basis will be subject to ordinary income tax. Tax laws are subject to change and you should consult a tax professional.
Neither the firm nor its agents or representatives may give tax or legal advice. Individuals should consult with a qualified professional for guidance before making any purchasing decisions. Investment advisory services offered through Blue Ridge Wealth Planners, a Registered Investment Advisor. Securities offered through Madison Avenue Securities, LLC (MAS), member FINRA/SIPC. MAS and Blue Ridge Wealth Planners are not affiliated companies.
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