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How Much Of My Retirement Savings Should be Roth IRA Money?

How Much Of My Retirement Savings Should be Roth IRA Money?

September 10, 2023

I’m having a lot of Roth IRA conversations with clients these days. Nobody likes to pay taxes and Roth IRA money comes out TAX FREE, so what’s not to like? Well, one thing that some folks don’t love is that all your Roth deposits are taxed as income in the year you make them. But, even paying the tax at the front, there is a lot to recommend Roth money for retirement savings.

So, how much Roth IRA money is enough? Generally, I suggest a target of about 50% of your retirement savings in Roth money. But your situation could vary widely. If you would like to talk with me about the details of your situation, I would love to do it. Just follow this LINK to find a time that works for you.

Tax-Free Distributions

The main appeal of the Roth IRA is that distributions are NOT taxed as income. For many of my retired clients with IRA money, they ALWAYS hate to take distributions from the traditional IRA to pay retirement expenses, because a $10,000 expense requires a $13,000 to $15,000 distribution to pay state and federal income taxes. While the advantage of saving to an IRA and letting the account grow tax deferred is real, my clients are always unhappy about the extra income tax bill.

Required IRA Distributions

As you most likely know, all IRA, 401k, 403b, and other retirement accounts are subject to required minimum distribution rules. Today, all earners who own a traditional retirement account are required to begin removing money from that account and paying income tax on the distributions in the year they turn 73. For most people, the first year distribution is around 4% of the account value. With a $1M IRA, that’s $40,000 of distributions AND it’s added to your existing taxable income. This can be a big, and unpleasant, tax bill.

But, Roth IRAs do NOT have Required IRA Distributions. This makes Roth IRA money very appealing to clients better than 73 years of age.

Strategically Pay the Tax

As I work with clients to plan for retirement, we always project forward to see where their income will need to come from. If they have large IRA balances, we evaluate the benefit of converting some, or all, of the traditional IRA money to Roth IRA money. There are a couple of key considerations as we evaluate this strategy.

FIRST – With US income tax rates at historic lows, it’s more likely than not that income tax RATES will rise over the next 20-40 years. So maybe taxes now are lower pound-for-pound than they might be in the future.

SECOND – The US has historic high national debt. Often Congress responds to large national debt by raising income taxes to generate additional revenue.

THIRD – For clients who are still working, added tax created by a Traditional IRA to Roth IRA conversion can be paid through payroll withholding. As you earn money, you can pay a bit more each month in tax. This method is often easier than waiting until Tax Day and writing a check.

If you have most of your retirement savings in traditional IRA accounts, or if your IRA accounts are pretty big, it could make a BIG difference when you pay the income tax on that money. Let’s talk about your situation and see what’s best for you. Just follow this LINK to find a time that works for you.

I am an experienced, highly-trained, CERTIFIED FINANCIAL PLANNER™ professional and Behavioral Financial Advisor. I am a financial planner who is an advocate for my clients ALL THE TIME – a fiduciary financial planner. I provide guidance based on clients’ best interests, not commissions or sales quotas. I think it’s the best way to serve clients and I am thrilled to work this way all the time.

If you would like to talk about your situation, I love to meet new people. So, follow this LINK to find a time for us to have a get-acquainted visit.

And yes, I’m still taking on a few great families to be part of my financial planning practice.

Dunncreek Advisors does not provide legal or tax advice, nor is this article intended to do so.