• Sunil K Pai, CFA

Your IRA - A Ticking Tax Time Bomb?

You know that 401K/IRA most of us are investing in for retirement--- what happens when the Required Minimum Distributions kick in in full force (starts at age 70.5)?


It is likely that if you are a higher net worth individual, you may have a whopping tax bill to cover at the then marginal tax rates.


Nothing really new but what we found is that there is no financial planning tool that financial advisors use that provides a comprehensive answer as to how an individual can manage this tax liability now. This strikes us as amazing given that between 401K and current traditional IRA money invested, it is a multi-trillion dollar issue.


And, the solution set is a function of determining many factors related to your current financial situation, projecting out your asset balances and, then figuring out how much you might be able to convert to a Roth IRA. A Roth IRA, while contributions and conversions are taxed at current rates, all future distributions from the Roth are tax-free.


It's not a no-brainer, you have to methodically look at your financial situation, your investments, and risk tolerances to do some calculations as to how to decide whether a Roth conversion makes sense to yoursituation. Knowing this and the fact that no one is offering it, we built the calculation engine in-house.


We embarked on this financial exercise recently for a client and it was quite eye opening for both the client and us. The benefits to this client were a function of:


1) Seeing how her current tax brackets look vs what they might be in retirement years

2) Determining whether to make a Roth conversion, how much and when

3) Determining the appropriate asset allocation mix now

4) Deciding on a pension payout vs annuity


We would stress that the key we found is that one must look at the entirety of each client's financial position and project it into the future. Most online calculators from the likes of Schwab, Vanguard, Fidelity, MoneyGuidePro are incredibly simplistic and don't encompass the key elements, as we note above.


In fact, if you do this correctly, you can improve your overall risk profile, earn more money towards retirement and keep more of it too. Now, that is financial planning worth a look today!


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