How to Pay the Tax Bill from a Roth Conversion for Railroad Retirement
Video Retirement Financial Planning Investing Taxes"Welcome to another installment of Highball Advisors Railroad Retirement Whiteboard. I'm John McNamara, and today we'll delve into Roth conversions—an effective strategy for building your nest egg in preparation for railroad retirement.
Imagine this: You've accumulated funds in your traditional IRA, now sitting tax-deferred. By converting these funds into a tax-free Roth IRA, you ensure they grow free from future taxation. Here’s the strategy: you pay taxes on the amount converted upfront, unlocking the potential for tax-free growth thereafter.
Let’s break it down. Say you have $1 million in your IRA and a 30% tax rate. After taxes, that’s $700,000 to convert. The upside? Once in a Roth IRA, your funds grow tax-free, accessible penalty-free after five years and age 59 and a half. This flexibility means you can use your funds for major purchases, medical expenses, legacy planning, and more.
Now, how do you handle the tax bill? Let’s say you’re converting $50,000 in the 22% tax bracket. You’ll owe $11,000 in taxes. The most efficient way to pay? Tap into your non-qualified accounts—like a brokerage or bank account—to cover this bill. By doing so, you maximize the amount growing tax-free in your Roth IRA.
Alternatively, paying taxes directly from your IRA reduces your Roth balance post-conversion. However, avoid withdrawing from your IRA prematurely (before age 59 and a half) to steer clear of a 10% penalty.
In conclusion, Roth conversions offer compelling advantages, especially in lower-income years. Interested in learning more? Reach out to start your personalized railroad retirement tax plan today. Don’t forget to subscribe for the latest updates. Until next time, stay safe, stay on track, and take care."
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Disclaimer: This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. Highball Advisors encourages you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from Highball Advisors, and all rights are reserved from Highball Advisors, and all rights are reserved.