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Recently answered questions
How Do I know If I’m Ready for the Golden Years?
Question by: George S. – Springfield, Illinois
@GeorgeS_Media
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Have you ever wondered if you’re truly prepared for retirement? Imagine you’re just a few years away from hanging up your work boots and you suddenly realize that your savings might not be enough to support the lifestyle you’ve dreamed of. It’s a common situation: many people think they’re on track, only to discover gaps in their retirement plan when it’s almost too late.
The reality is that effective retirement planning involves more than just saving a portion of your paycheck. It’s about strategically managing your investments, understanding the benefits of various retirement accounts, and making informed decisions that align with your long-term goals. Have you considered factors like inflation, healthcare costs, and unexpected expenses? These can significantly impact your retirement funds, making it crucial to plan beyond just the basics.
By engaging in thorough retirement planning, you can address these potential pitfalls head-on. Start by evaluating your current financial situation and setting clear, achievable retirement goals. Assess your savings, investments, and expected income streams, including Social Security and employer benefits. With a well-rounded strategy, you’ll be better equipped to navigate the complexities of retirement and ensure that you enjoy the freedom and security you’ve worked so hard to achieve.
Is it Wise to Convert 10% of My 401(k) into a Roth IRA Each Year to Avoid Taxes and RMDs?
Question by: Alicia K. – Ontario, CA
@AliciaS_Media
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It’s definitely smart to be thinking about this, Cathy. Systematic Roth conversions like the ones you’re describing have the potential to reduce your lifetime tax liability, increase your odds of a successful retirement, boost your flexibility by reducing future RMDs and even leave more money for your heirs.
There’s a lot to like, but there are some potential pitfalls as well. It’s not always easy to figure out when Roth conversions make sense or how much to convert. Converting 10% of your 401(k) per year may not be the best strategy but here’s what you should be thinking about. (And if you need more help with important financial decisions in retirement, consider working with a financial advisor.)
What’s the True Tax Cost?
When considering whether to convert pre-tax money to a Roth account, you need to compare tax rates. If your tax rates are lower now than you expect them to be in the future, then a Roth conversion makes sense. If your tax rates are higher than you expect them to be in the future, you shouldn’t convert.
The conventional wisdom then is to look at your federal and state income tax rates now and compare them to what you think they’ll be in the future. And while that’s a good start, it doesn’t always tell the whole story.
As Ben Henry-Moreland explains well here, your marginal income tax rate is only part of the story. Because our tax code includes a multitude of credits, deductions, phase-outs and other variables that are dependent upon taxable income, adding or subtracting income can have a bigger impact than what you’d calculate if you were only comparing income tax brackets.
For example, a Roth conversion could:
- Increase the amount of Social Security income that’s taxed
- Push your capital gains into a higher tax bracket
- Decrease the amount of medical expenses you can deduct
- Increase Medicare premiums
- Reduce the health insurance subsidy you’re eligible for
Of course, the reverse of all of those things could also be true. By converting some of your money to a Roth IRA now, you could lower your taxable income in future years and therefore reduce the amount of Social Security income that’s taxed in the future or increase the amount of medical expenses you’re eligible to deduct.
In other words, the impact of a Roth conversion could be bigger than expected in either direction.(A financial advisor can help you determine the relevant tax rates so you can make a wise decision on whether or not to convert a 401(k) into an IRA or Roth IRA.)
How to Approach Roth Conversions
While all of that creates opportunities to do some good planning, it does make things a little more complicated. To start, I wouldn’t assume that converting 10% per year is the right move. The dollar amount matters a lot more than the percentage since it’s the dollar amount that will impact your taxable income and therefore the overall tax cost.
I also wouldn’t assume that you should convert the same amount every year. Depending on the rest of your situation, it may be that in some years it makes sense to convert more and in other years it makes sense to convert less.
The best way to make this decision is to run your situation through tax software that can model different scenarios and estimate the lifetime tax cost of each. Projections are never perfect, but this would give you a better idea of the actual impact of converting different amounts from year to year.
That’s tough to do yourself, though. If you’d like to get it right, it may be worth working with a good fee-only financial planner. That could be someone you work with on an ongoing basis, or it could be someone you hire on an hourly or project basis just to help you decide how much to convert this year and in the future. (And if you need help finding a financial advisor, try this matching tool.)
Next Steps
If that’s too much or just not feasible right now, then using your income tax brackets as a guide would be a reasonable next-best option. Try to calculate your taxable income without any conversions, decide which tax bracket you’d like to fill with your conversions (before going into the next, higher tax bracket) and convert enough to get your taxable income right near the top of that bracket.
Just know that there may be some unintended consequences and that the cost could be higher or lower than expected. (And if you need more help with important financial decisions in retirement, consider working with a financial advisor.)
Tips for Finding a Financial Advisor
- Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
How do I Get the most out of My Social Security benefits?
Question by: Ben.L. – Camden, NJ
@benL
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Many people face confusion when it comes to navigating the complexities of Social Security. Common questions include: Should you start claiming benefits at 62, or wait until full retirement age or even 70? How will your claiming strategy affect your monthly payments and overall benefits? It’s a crucial decision that can impact your financial stability for decades. With numerous factors to consider—such as your health, longevity, and retirement plans—understanding the best time to claim can be overwhelming.
Optimizing your Social Security benefits involves more than just choosing when to start receiving payments. It’s about evaluating how your decision fits into your broader retirement plan and considering how other income sources and financial strategies will interact with your Social Security benefits. By consulting with a financial advisor and using detailed calculators, you can make an informed choice that aligns with your personal situation and goals. Ready to maximize your Social Security benefits?
How Can I prevent Overpaying My Taxes?
Question by: Irish W. – Findlay, OH
@Irishbloom39
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Have you ever felt a sinking feeling when you see your tax bill and wondered if there’s a way to reduce it? Picture this: It’s tax season, and despite your best efforts to save and invest wisely, you find yourself paying more in taxes than you anticipated.
Many people struggle with tax minimization because they’re not aware of the various techniques and strategies that can help reduce their taxable income. Common issues include missing out on deductions, not taking advantage of tax-advantaged accounts, or failing to optimize investment income. With tax laws constantly changing, staying informed about new opportunities and ensuring that you’re applying them correctly can be challenging. Are you making the most of available tax-saving strategies, or could you be leaving money on the table?
Effective tax minimization involves a proactive approach to managing your finances throughout the year, not just during tax season. Start by reviewing your current tax situation and identifying areas where you might benefit from adjustments. Consider utilizing tax-advantaged accounts such as IRAs or HSAs, exploring deductions and credits you might qualify for, and strategically planning your investments. By working with a tax professional and regularly updating your tax strategy, you can reduce your tax burden and enhance your overall financial health.
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