In the spirit of everyone’s favorite holiday, Tax Day, this month I’d like to talk about how paying taxes today can help set up a future free of tax for both you and your heirs. You probably have heard of it: The Roth IRA.
But wait, you may be thinking that we are discussing abundance and giving money away….and then I go and bring up a retirement account. Yes, Dear Reader, I am. In my humble opinion, the Roth IRA is the greatest tool to give your assets to the next generation and deserves its own spotlight in our annual Year of Abundance series.
Invented in 1997 by Senator William Roth via The Taxpayer Relief Act of 1997, this modernization of retirement planning encouraged workers to pay their income taxes “today” in exchange for the potential of tax-free withdrawals in retirement…on both the principal and gains! This innovation gave families a third avenue outside of the standard after-tax investing (pay capital gains on the growth) and tax-deductible investing (pay ordinary income tax on the gains). One where the holy grail of tax planning lives: tax free income.
Now, fast forward a few decades and a lot of Baby Boomers created a large nest egg in their Roth IRAs through contributions and conversions. Their dreams of a tax-free retirement income came true, but so did another unintended consequence: tax-free transfer of assets to their heirs. This became a game changer. Quickly, families saw the advantages of this wealth transfer technique where inherited pre-tax retirement accounts created large tax bills when the next generation inherited the money. A greater concept of strategic tax planning across multiple generations became common among the working class that was usually just reserved for families that came from generational wealth. Working people everywhere are becoming the founders of generational wealth thanks to the uptick of 401(k) plans, and for the first time are thinking about strategic tax planning to their children and grandchildren. Enter the Roth IRA.
This planning technique has become so popular that high income earners are trying to get in on the game. Usually capped due to their income, they are finding loopholes via Backdoor Roth IRA conversions and 529 conversions for their children with education accounts. The goalposts are ever-changing in this department, so I urge you to seek professional guidance when exploring these two planning techniques. There is a sneaky trapdoor called the Pro-Rata Rule that can mess up the best planned conversion techniques.
I urge anyone, no matter how much or how little income you earn, to consider the merits of using the Roth IRA as a generational wealth transfer tool. It’s clean. It’s easy. It works.
Kimberly Enders CFP® CPFA
CERTIFIED FINANCIAL PLANNER®
Enders Wealth Management
37800 Van Dyke Ave, Suite 125
Sterling Heights MI 48312
www.enderswm.com
#kimenderscfp
Before making financial decisions, please consult with your tax advisor to ensure these general guidelines apply to your specific situation.
The views stated are not necessarily the opinion of Cetera Wealth Services, LLC, and should not be constructed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.
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Converting from a traditional IRA to a Roth IRA is a taxable event. Roth IRA offers tax free withdrawals on taxable contributions. To qualify for the tax-free and penalty-free withdrawal or earnings, a Roth IRA must be in place for at least five tax years, and the distribution must take place after age 59 ½ or due to death, disability, or a first-time home purchase (up to a $10,000 lifetime maximum). Depending on state law, Roth IRA distributions may be subject to state taxe