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Beginner's Guide to Roth Conversions
September 6, 2024
Planning for retirement can feel like navigating a maze, especially when it comes to taxes and ensuring you leave behind a strong financial legacy for your loved ones. One strategy that more and more people are exploring is a Roth conversion. But what exactly is a Roth conversion, and how can it benefit you? Let’s break it down in this beginner-friendly guide.
What Is a Roth Conversion?
A Roth conversion involves moving money from a traditional retirement account, like a 401(k) or a traditional IRA, into a Roth IRA. Why would you do this? The key difference between these accounts is how they are taxed. With a traditional IRA or 401(k), you get a tax break upfront when you contribute, but you’ll pay taxes on the money you withdraw in retirement. With a Roth IRA, you pay taxes on the money before you contribute, but then you get to withdraw it tax-free in retirement.
Why Consider a Roth Conversion?
Now that you know what a Roth conversion is, let’s explore why it might be a smart move for you:
- Tax-Free Withdrawals in Retirement: By converting to a Roth IRA, you can enjoy tax-free withdrawals in retirement. This can be a huge benefit if you expect to be in a higher tax bracket when you retire or if you’re worried about rising tax rates in the future.
- No Required Minimum Distributions (RMDs): Traditional IRAs require you to start taking distributions at age 73, whether you need the money or not. Roth IRAs, on the other hand, have no required minimum distributions during your lifetime, giving you more control over your money.
- Leaving More to Heirs: If one of your financial goals is to leave money to your heirs, a Roth conversion can help. Since Roth IRAs don’t have RMDs, your account can continue to grow tax-free, potentially leaving more for your beneficiaries. Plus, your heirs can withdraw the money tax-free, which can be a significant advantage.
- Hedge Against Future Tax Increases: Converting to a Roth IRA now, while tax rates are historically low, could save you money if tax rates increase in the future. It’s a way to lock in your current tax rate and avoid potentially higher taxes later on.
When Does a Roth Conversion Make Sense?
A Roth conversion isn’t for everyone, and it’s important to consider whether it makes sense for your specific situation. Here are a few scenarios where it might be particularly beneficial:
- You Expect Higher Taxes in the Future: If you think tax rates will go up or you’ll be in a higher tax bracket in retirement, paying taxes now with a Roth conversion could save you money in the long run.
- You Have a Long Time Until Retirement: The longer your money has to grow in a Roth IRA, the more you can benefit from tax-free growth.
- You Want to Leave a Tax-Free Legacy: If you’re focused on maximizing what you leave to your heirs, a Roth conversion can be a powerful tool.
What Are the Drawbacks?
While Roth conversions offer many benefits, there are a few potential downsides to consider:
- Immediate Tax Bill: When you convert a traditional IRA to a Roth IRA, you’ll owe taxes on the amount you convert. This can be a significant cost, especially if you’re converting a large amount.
- Higher Income Taxes: The amount you convert is added to your taxable income for the year, which could push you into a higher tax bracket.
Is a Roth Conversion Right for You?
Deciding whether to do a Roth conversion depends on your individual circumstances, including your current tax bracket, future income expectations, and retirement goals. It’s a complex decision, but one that could have significant benefits for your financial future.
Ready to Explore Your Options?
If you’re curious about whether a Roth conversion could be right for you, we’re here to help. At Stanton Advisory Group, we specialize in helping our clients navigate the complexities of retirement planning and tax strategies.
Schedule a Consultation with us today to explore how a Roth conversion could fit into your financial plan and secure a brighter, tax-efficient future.
The end of the year is fast approaching, which means it's time to get your financial house in order before 2025. This can help ease tax season stress and ensure you're set up for a smooth start to the new year. To get ahead, here are eight key financial planning tips to consider: 1. Organize Your Documents for Taxes Tax season will be here before you know it, so now is the perfect time to start gathering important documents, like bills, bank statements, and receipts for any deductible expenses. Staying organized makes filing much easier and helps you avoid missing out on potential deductions. 2. Review Your Filing Status Did your marital status change this year? Getting married, divorced, or welcoming a new child into your family can impact your filing status and, consequently, your tax bill. Checking your status now can help avoid surprises and possibly lead to a bigger refund. 3. Max Out Your Retirement Contributions Have you contributed the maximum amount to your retirement accounts? For 401(k) and 403(b) plans, the limit for 2024 is $23,000. If you're 50 or older, you can take advantage of catch-up contributions, adding an extra $7,500. Looking ahead, those aged 60-63 can contribute even more in 2025 with an additional $10,000 catch-up limit. 4. Check Your Estate Plan Life changes can also affect your estate plan. Now is a good time to review your will, trusts, and beneficiary designations to ensure they align with your current situation and goals. Updates to estate tax laws could also mean adjustments are needed. 5. Review Insurance Coverages Open enrollment is coming up for many employer benefit plans, so it’s a great time to review your health, life, long-term care, and disability insurance. Make sure your policies provide adequate coverage, especially if you’ve had major life changes like marriage, a new baby, or purchasing a home. 6. Think About Your Investments The end of the year is a good time to review your investment portfolio and ensure it still aligns with your financial goals. If you have any underperforming stocks, consider selling them to offset capital gains elsewhere. And don't forget—if you've sold cryptocurrency, the profits are taxable too! 7. Plan for Required Minimum Distributions (RMDs) If you turned 73 this year, you’ll need to take your first RMD by April 1, 2025, and your second by December 31, 2025. RMDs apply to certain retirement accounts like 401(k)s and IRAs, so make sure you’re prepared to take the correct amount to avoid penalties. 8. Evaluate Your Charitable Contributions If you plan to make charitable donations, now is the time to do it. Donations made to qualified charities can be tax-deductible, and if you itemize, this can offer significant tax savings. For those over 70½, you can also use a qualified charitable distribution (QCD) to donate up to $100,000 tax-free. Financial health requires regular monitoring, and these year-end steps can help keep you on track for a prosperous 2025. Schedule a consultation today to make sure your financial plan is aligned with your goals.
Elections have always been a time of uncertainty for markets, with investors wondering how political changes might affect their portfolios. However, history tells us that markets are resilient, and long-term strategies often withstand the ups and downs of election cycles. Here’s how elections impact markets and why sticking to your plan can lead to strong returns. 1. Market Uncertainty vs. Political Affiliation One of the key drivers of market fluctuations during elections is uncertainty, not the political party in power. Markets generally dislike uncertainty, and elections introduce a sense of unpredictability as policies and leadership could shift. However, it’s important to note that since World War II, no political party has consistently experienced superior market returns. This suggests that while short-term volatility may occur, the markets have trended upwards over the long term, regardless of who holds office. For investors, this is a critical reminder: rather than reacting to the headlines, focus on the policies that will likely impact the market, such as tax reforms or regulatory changes, and not the personalities involved. 2. Historical Election Year Returns Historically, election years have been positive for investors who stayed the course. In 20 of the last 23 election years, a balanced 60/40 portfolio (60% stocks, 40% bonds) finished in positive territory. On average, election years delivered an 8.5% return. The three exceptions were due to broader macroeconomic factors, not political outcomes. This data demonstrates that, despite the uncertainties elections may bring, staying invested during these times has typically paid off. Pulling out of the market or drastically changing your investment strategy based on election results can lead to missed opportunities for growth. 3. The Impact of Tax Policies Tax policy changes are often a focal point during election cycles, and they can indeed influence markets. For example, past tax hikes have had mixed effects on market performance. Between 1931-1932, tax increases contributed to a market decline of -27.9%. However, from 1934-1936, the market saw a 24.9% increase despite higher taxes. More recent periods of tax changes, such as the 2012-2013 increases in individual and capital gains taxes, coincided with a 23.9% market gain. This historical perspective underscores that while tax policy changes can have short-term effects, they do not typically dictate long-term market trends. Investors should be prepared for potential policy changes, such as the expiration of the Tax Cuts & Jobs Act in 2025, but not allow these potential shifts to derail a well-thought-out investment plan. 4. Sticking to the Plan The most important takeaway for investors is that staying the course during election years and beyond has historically been a winning strategy. Research shows that forward 4-year returns following elections have been robust, regardless of the outcome. Reacting emotionally or making hasty changes in response to political shifts can undermine long-term goals. In times of uncertainty, it’s easy to feel compelled to make adjustments. However, having a solid investment plan, tailored to your goals and risk tolerance, means you shouldn’t need to react to short-term events, including elections. Webinar Invitation To dive deeper into how elections and other global events influence markets, join Stanton Advisory Group for an exclusive webinar on October 14th at 3 p.m. CST. In partnership with financial experts, we’ll explore more on this topic and provide actionable insights for navigating election year volatility. Email us to receive the registration link. Call to Action If you’re concerned about how elections might affect your portfolio or are unsure whether your current strategy is optimized for the long term, now is the time to take action. Schedule a consultation with Stanton Advisory Group today to review your plan and ensure you’re on track for financial success, regardless of the political landscape. Disclosure: Please remember that all investments carry some level of risk, including the potential loss of principal invested. They do not typically grow at an even rate and may experience negative growth. As with any type of portfolio structuring, attempting to reduce risk and increase return could, at certain times, unintentionally reduce returns. Diversification and strategic asset allocation do not assure profit or protect against loss in declining markets. This material does not constitute legal, tax, securities, or investment advice. Consult a licensed professional for tailored advice.
Estate planning is a crucial yet often overlooked aspect of financial planning. Ensuring that your assets are distributed according to your wishes, and that your loved ones are taken care of, requires careful preparation. This guide will walk you through the essential components of estate planning, explain why they are important, and provide a glossary of common terms. Why Estate Planning is Important Estate planning is about more than just drafting a will. It involves making arrangements to manage your estate during your lifetime and beyond. A comprehensive estate plan can help reduce taxes, legal fees, and court costs, provide for your family, and ensure your healthcare wishes are carried out if you become incapacitated. It’s an essential part of your financial planning that ensures your legacy is preserved and your loved ones are cared for according to your wishes. Key Components of Estate Planning Will: A legal document that spells out your wishes regarding the distribution of your assets and the care of any minor children. Without a will, the state laws will determine how your assets are distributed, which might not align with your wishes. Power of Attorney (POA): This legal document allows you to appoint someone to manage your financial affairs if you are unable to do so. There are different types of POAs, including general, durable, and limited, each serving different purposes. Healthcare Directive (HCD): Also known as a living will, this document specifies your healthcare preferences if you become incapacitated and cannot make decisions for yourself. It often includes a Medical Power of Attorney, which designates someone to make healthcare decisions on your behalf. Trusts: These legal entities hold and manage assets on behalf of your beneficiaries. Trusts can provide significant benefits, including avoiding probate, protecting assets from creditors, and providing for minors or individuals with special needs. There are several types of trusts, including revocable and irrevocable trusts. Common Terms Beneficiary: A person or entity designated to receive benefits from an estate, trust, insurance policy, or retirement account. Executor: The person appointed in a will to manage the estate, ensuring that assets are distributed according to the will and that all legal and financial matters are resolved. Grantor: The person who creates a trust. Probate: The legal process through which a deceased person’s will is validated, and their estate is administered and distributed. Revocable Trust: A trust that can be altered or revoked by the grantor during their lifetime. Irrevocable Trust: A trust that cannot be changed or terminated without the beneficiary's consent once it is established. How Estate Planning Fits into Your Financial Plan Incorporating estate planning into your financial plan ensures that all aspects of your financial life are aligned and working together towards your goals. Here are some ways estate planning fits into a comprehensive financial plan: Protecting Your Legacy: An estate plan ensures that your assets are distributed according to your wishes, preserving your legacy for future generations. Providing for Loved Ones: Through trusts and beneficiary designations, you can provide for your loved ones in a way that meets their needs and protects their financial future. Minimizing Taxes and Expenses: Proper estate planning can reduce the taxes and administrative costs associated with transferring your estate to your heirs. Ensuring Healthcare Wishes: A healthcare directive ensures that your medical preferences are honored, providing peace of mind for you and your family. Disclaimer Please note that Stanton Advisory Group is not a law firm, and we do not provide legal advice. For legal advice and services, please consult a qualified attorney. Estate planning is a vital part of your financial journey, and it's never too early to start. To learn more and begin creating a plan tailored to your unique needs, schedule a consultation with Stanton Advisory Group today. Our team of experts is here to guide you through every step of the process.
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