We hear it all the time. Someone close to retirement has minimal to no money in their Roth bucket. And they avoided it because they earned too much money.
What they didn’t know was that 401k/403b/TSP rules differ from IRA rules, and there is no income test, so they can contribute to a Roth in their 401k/403b/TSP plan, if their plan permits it.
Another option if someone earns too much is to look into backdoor Roth IRA conversions.
We also hear quite often one spouse from a married couple tell us: “I was told by (insert professional) that I couldn’t contribute because I wasn’t working.” While that is true for individuals who are not working, married couples can qualify to contribute to a Roth IRA as long as at least one spouse is working and earning income.
Why is this important? Roth offers flexibility in tax planning in retirement; there are implications on Required Minimum Distributions, healthcare premiums, and deductions someone can qualify for, and having a Roth allows you to influence those variables.
When you are earning a W2, you generally have limited influence over your taxes. But when you retire, you decide which bucket to pull from, and when. Should you pull from a Traditional, Roth, or Taxable bucket, or a combination?
We constantly hear about asset diversification, but not enough about tax diversification. The goal of asset diversification is to help optimize the return for the level of risk you take. The goal of tax diversification is to help optimize (i.e., mitigate) the tax you pay for the level of cash flow needed to cover your retirement expenses.
The highest tax rate in US history? 94%
The highest tax rate today? 37%
If you aren’t thinking about ways to leverage the low tax rates through strategies like Roth contributions and conversions, you could be missing out on proactive planning opportunities that can save you in the long run.
Any opinions are those of Vocare Wealth Advisors and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional. Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification and asset allocation. Prior to making an investment decision, please consult with your financial advisor about your individual situation.
