Few disagree with the premise we will pay higher tax rates during our retirement years than we did during our working years. This is the complete opposite of what we thought when funding our 401(k) or other deferred savings plans. Roth Conversions could help protect from runaway taxation; however, it may be just one piece of a complex retirement planning puzzle.
Deferred compensation, which includes IRA’s like the 401(k), was introduced in the late 1970’s and touted as a means to accumulate retirement savings while avoiding, or at least postponing, taxes. The success of the strategy can be measured by the trillions in today’s baby boomers’ investment accounts.
The premise of the program was to deferred tax during one’s higher taxed income generating years and then enjoy the taxable distributions during retirement when tax rates would be much lower. Part one of the deferred tax strategy worked incredibly well for most people. According to Goldman Sachs, the stock market return since 2008 has been 9.2%! However, part two of the strategy “lower taxes on distributions” may not prove to be true.
In 2007, prior to the financial crisis, the US Debt to Gross Domestic Product (“GDP”) was 62%; by 2020, the ratio was up to 129%! Clearly, our government’s indebtedness, which appears will go unchecked in the foreseeable future, will result in higher tax rates. “Tax the rich, tax corporations” … is the battle cry of the Biden administration. The truth is, there simply is not enough revenue even if the two tax-targets were hit with historic-high tax rates. The only proven source of revenue for the US government has been on the back of the middle class. When President Biden talks of increasing taxes only on corporations and “the rich”, it’s like watching a bumbling magician who doesn’t know everyone can see the hidden card up his sleeve.
Is a Roth Conversion a good strategy for your tax-exposed deferred savings? Unfortunately, there is no “one-size fits all” answer for this complex question. Any financial advisor giving blanket advice on Roth Conversions is no better than the doctor who prescribes medicine without an examination…both are pure malpractice!
Retirement Architecture’s Founder, Brett Saso demonstrates a Roth Conversion “waterfall” strategy using the company’s proprietary retirement blueprinting technology.
Blueprinting your retirement plan is a great first step when contemplating a Roth conversion. The last thing you want is a nasty reaction from a Roth prescription given without a proper examination.