Page 86 - Ready Set Retire

Stephen J. Kelley

Here you can see the ongoing impact of converting to a Roth.
In this illustration, the taxing of Social Security goes from 85%
of benefits to zero, without affecting income. The only
difference is the money coming from the retirement accounts;
on the left is a traditional IRA, on the right, a Roth. In addition,
with the standard deduction for married seniors, it’s entirely
likely no taxes at all will be due.

Assume that the effective tax rate is 10%. The difference made
will be approximately $6,000 a year. If you have a 20-year
retirement, that’s $120,000 in savings. Tax free, at zero cost to
you. If taxes rise it’s even more. And it doesn’t rely on taking
more market risk or compromising your future. You might call
it free money!

There are some misconceptions about Roth IRAs and Social
Security that should be clarified. The first has to do with the
conversion of IRAs to Roth IRAs. Many people believe there
is an income cap or a limit to what can be converted. It’s
important to understand the difference between contributions
and conversions. When contributing to a Roth, there are
limitations, but when converting no such limitations exist. You
need only pay the taxes. One great thing about this technique
is it recaptures most or all the conversion taxes, and
sometimes, even more.

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