Someone in Your Financial Corner

Should I do a Roth conversion?

Taxes are on everybody’s mind right now. Historically, we’re at one of the lowest nominal rates we’ve seen in years. But the national debt needs to be paid and historically, that’s done through taxes. In some cases, a Roth conversion makes sense. In others, it doesn’t. Roth conversions are an attractive process because Roth IRAs grow tax-free and qualified withdrawals are also tax-free. Roth IRAs don’t have RMDs (required minimum distribution), so you can just let your contributions grow tax-free. If you pass away and your heirs inherit your Roth IRA, they won’t have to pay taxes on distributions either. This is one reason you need a wealth advisor in your corner to help you evaluate what’s best for your specific circumstances.

When should I take social security?

Social security is a big piece of your retirement income, a guaranteed piece of income. But should you take it early because you don’t think it will be around or take it late to get every dollar you can? Retirement is like a Rubik’s cube. You can’t move one piece without moving the others. It’s important to look at all the pieces of your retirement plan. If you delay receiving Social Security, you may be spending more of your money upfront. But if you take right away, how does that impact your taxes throughout retirement? Then, you need to understand what happens if you’re married, one spouse passes away, and you move into a single-payer tax bracket. If you have family history of longevity, it may make sense to delay. It’s not cut and dry like people think, but we can help you consider all these variables.

How much money do I need to retire?

If you can tell me the exact time and day you’ll pass and how much you will make every year until then, I can answer this question. But the answer is different for everybody depending on your lifestyle, spending, liabilities, and responsibility. A good rule of thumb is to consider how much you’re spending in today’s dollars. Then consider taxes, Medicare, inflation, etc. My firm does these calculations for our clients, working with them to customize their unique plan. We know the right questions to ask to take in all your data and build a tailored plan around you and your goals.

What’s a common mistake you see people make?

I see people take money out of their retirement fund to pay off debts. You’re essentially taking money out of a tax-free account and then you have to pay Uncle Sam taxes at 10-30% to pay off a loan that’s generally less than 10% interest. Withdrawals before age 59 ½ typically face a 10% penalty and are taxed as regular income. This can significantly reduce the net amount available to pay off the debt, and you also lose the potential for future growth and compound interest. Before resorting to retirement withdrawals, you might explore other options like borrowing against your 401(k) (if allowed by your plan), consolidating debt, or negotiating lower interest rates.