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3 Things 1-15-24

Thing One


To Roth Or Not To Roth?


Well, that really isn’t the question.  Given our government’s current spending levels, debt, deficits, etc., there’s really no contest between a Roth IRA, which invests your retirement money on an after-tax basis and a Traditional IRA which invests your retirement money on a pre-tax basis.  All the government (people’s) debt and future promises must eventually be paid for and there is only one source – our tax dollars.  And as those debt and unfunded promise levels rise, so too must the tax rates.  Now, the politicians who are trying to get re-elected will try to convince you that only “the rich” will pay more, but the math simply doesn’t work.  There aren’t enough rich people to come anywhere close to covering the bill unless the term rich is dumbed down to include middle class savers who have managed to accumulate significant amounts in the retirement accounts.


All that says the Roth IRA wins hands down.  If two savers each have $1 million in an IRA, Saver A in a Traditional IRA and Saver B in a Roth, Saver A doesn’t really have $1 million because he will have to pay taxes on it while Saver B actually has $1 million because he already paid his taxes and no more will ever be owed.  If you were starting your retirement account today and you had a choice between the two it is an absolute no-brainer to pick the Roth.


If you already have a pile of cash in a Traditional IRA though, it’s definitely a brainer.  You’d still be better off in a Roth but you’d need to figure out if and when it made sense for you to convert from your Traditional IRA to a Roth.  The chief consideration is obviously the tax bill you would trigger as any money converted to a Roth becomes income the moment it is converted so taxes would be due.  For that reason, most people who convert do so gradually using amounts that take their income to the maximum level in their current tax bracket without spilling over into the next and increasing their overall tax rate.  Retirees in this category of people are in a sweet spot of sorts from a conversion perspective because between the age of 65 (assuming that’s when they hang it up) and 72 (when they must start taking required minimum distributions from their IRAs), their income will drop and make it much easier for them to do some converting every year and absorb a lesser tax hit.


As a final note on retirees doing the Roth conversion, we’ll point out that some retirees who don’t expect to personally benefit still do the conversion for the benefit of their non-spousal heirs.  Under the Secure Act, which was passed in 2019, non-spousal heirs who inherit a Traditional IRA now only have 10 years to take all the distributions (and pay the taxes due) from the IRA rather than a lifetime.  The proceeds from an inherited Roth must also now be taken within 10 years, but in addition to not owing any taxes on the proceeds, the non-spousal beneficiaries would have enjoyed nine years of tax-free growth.



Thing Two


Beware The Social Security Torpedo


The following is excerpted from


"...The Social Security tax torpedo refers to a spike in taxes that retirees might face after receiving benefits. Much if it depends on your age and the amount of income you earn. The Social Security Administration considers you “retired” when you start receiving retirement benefits… As for how Social Security benefits are taxed: It depends on your provisional income, which Fidelity refers to as “essentially your modified adjusted gross income, plus nontaxable interest income, and half of your Social Security benefits for the year.  Provisional income in excess of $34,000 for a single filer and $44,000 for a married couple filing jointly can result in up to 85% of your Social Security benefit being taxed. Below these thresholds, a smaller percentage of your benefit is taxed.

The tax torpedo occurs when your provisional income moves you into a higher Social Security tax bracket. After that, every additional dollar of income can have a double impact — first through taxes on additional dollars, and then on taxes to another portion of your Social Security benefit. Once you surpass the threshold, the double impact no longer applies.


Six Ways To Avoid The Torpedo:


  1. Use a Roth IRA: Because distributions during retirement are tax-free, your Roth IRA income doesn’t count toward your retirement income. This lowers the likelihood that you’ll pass the tax torpedo threshold, according to SmartAsset.

  2. Wait until age 70 to claim Social Security: This ensures you won’t have to pay any taxes on Social Security income – and you get the added bonus of the highest possible Social Security check.

  3. Move to another state. Only 11 states impose state income taxes on Social Security benefits, so if you live in one of these states, you can avoid the tax torpedo by moving elsewhere. These are the states where you’ll face taxes: Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, Rhode Island, Utah and Vermont.

  4. Donate IRA income to charity: As Smart Asset noted, qualified charitable distributions (QCDs) let you donate money directly from your traditional IRA to charity. The government doesn’t count the first $100,000 of donations as taxable income, which could lower the portion of your Social Security benefits subject to taxation.

  5. Buy a Qualified Longevity Annuity Contract: A QLAC is a type of annuity that provides a guaranteed income stream for life. When you transfer money from an IRA or 401(k) into a QLAC, you reduce the required minimum distribution and the amount of income subject to the torpedo tax.

  6. Hire a financial advisor: A qualified tax or financial pro will be able to provide advice on how to avoid the tax torpedo and maximize your Social Security benefits and retirement earnings..."


Thing Three


“Education must enable one to sift and weigh evidence, to discern the true from the false, the real from the unreal, and the facts from the fiction.” – Martin Luther King Jr.


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