There is nothing like waking up on a Monday morning…and taking a look at our national debt. That certainly ought to get your juices going, so let’s take a good look:
Are you aware that as of September 2023, it costs 879 billion dollars to simply maintain our debt each year? This is 14% of the federal spending budget.1 Did you know that our deficit for fiscal year 2023 is currently 1.7 trillion-dollars, which an increase of 23 percent in just one year? 2
It doesn’t take a rocket scientist to realize that if tax revenue is the primary source of income for the federal government, then it will most likely need to be increased in order to pay for the mounting deficit. This alone may be the reason why you think converting your IRA to a Roth IRA would be wise. This is especially the case during these few years under the Tax Cuts and Jobs Act of 2018, which has allowed many people to see lower tax rates.
A good friend and colleague, who produces information for advisors across the country, coined Top 8 Reasons Why You Shouldn’t Convert!...and Top 8 Reasons Why You Should Convert!3 Let’s take a look.
Here is why you should not:
- Because you’re so in love with someone at the Internal Revenue Service, you want to give them as much money as possible. (Credit: Van Mueller)
- You want to make sure your Social Security is taxed at the maximum level available for as long as you live.
- You want to save high tax rates for your kids to enjoy.
- You like higher premiums on Medicare.
- You don’t want to pay taxes now – you want to wait so the check is big enough to justify the stamp.
- You want the IRS to be your primary beneficiary.
- You believe the government is better at spending your money than you are.
- Your income is low enough that you’re not paying taxes on distributions and converting would create a tax.
Yes, that does sound a little sarcastic. In reality, not everyone will be taxed at the maximum level available on their Social Security or pay higher premiums on their Medicare with their Required Minimum Distributions kick in. Not everyone’s children would pay higher taxes under the current code. Not everyone has children. And there are those with strong charitable inclinations that certainly warrant not converting.
The truth of the matter is that if you have an IRA, 401(k), or any other type of retirement account (especially a larger one) it would be extremely foolhardy to not fully understand your situation - as soon as possible. As mentioned before, the Tax Reform years may be golden for your plan.
So, here is why you should convert:
- Pay tax on the seed and the crops grow free
2. Because you still can
3. Pay taxes while they’re on sale
4. Avoid RMDs (not on 401ks or 403bs)
5. Extend creditor protection
6. Potential LTC/Medicaid protection (limited options in limited states. Indiana – no protection.)
7. Accelerated payouts to non-spousal beneficiaries
8. Your kids/beneficiaries are in a higher tax bracket than you are
Again, converting really isn’t wise for everyone, but it is unwise to not fully understand your unique situation and whether or not you should. We are facing unprecedented times. Though no one has a clue about where tax rates will go, there is an equation I want to bring to your attention:
Tax Revenue = (Number of Tax Payers x Tax Rate)
The baby boomers are leaving the workforce. Our working population is currently in decline. If the number of tax payers goes down, it is basic match to determine what must happen to the tax rate.
Your opportunity to convert your IRA may be the wisest move you ever make. It may not, but you won’t know until you ask. Let us help you take a look!