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Timing the Roth Conversion for Railroad Retirement

Video Retirement Financial Planning Investing Taxes


Market got you down? Here's a possible tax planning opportunity that might help you.

Welcome everyone to another edition of the Highball Advisors Railroad Retirement Whiteboard. My name's John McNamara of Highball Advisors and today I want to talk about the market's down. Or at the time of filming it's down on the year, who knows by the time this is released. One only wonders, but anyway, it also presents some opportunities. So when I talk to my clients, everybody talks about investments. That's what you hear from a lot of advisors and things, but there's also tax planning. Tax planning is so important. Hey, I did great on my money. Oh, by the way, I gave it all to Uncle Sam. So tax planning is very important, big part of putting together a great financial plan.

So what I wanted to talk to you about is Roth conversions here. When the market is down, there's an opportunity here. Why we do the conversion? So count value is down and we can do a lower tax payment. If you're doing that conversion and I'll talk about that in a minute, exactly what that is. It's going to be a lower tax payment now that the account value is down. All right. Then the other thing is you have to remember the tax rates are going up in 2025, like it or not because the current tax rates expire. So now is also another opportunity, even if the market wasn't down, something to think about, but now with this count value is down.

So when I talk about Roth conversions, what am I exactly talking about? I'll keep it simple. If you had a traditional IRA and obviously there's other things with 401ks, but just a traditional IRA, you take it out, you pay the ordinary income tax on it. Then it moves it to a Roth IRA. So it's that one time pain. So to speak of paying the taxes. But now this is all tax free for infinity. So you're saying to yourself, market's down. I'm going to pay my ordinary tax rate on it. It's going to be less this year because the market's down and then when the market goes back up, that's all going to grow tax free. So that's an opportunity.

So who does this really benefit here? I always say retirees, what I like about railroaders, especially if you can leave the railroad early, you have such a long runway until you're required to take the money out. So I say railroad retirees are very big and then also very high income individuals are because they probably might never move their tax bracket. So anytime you get an opportunity like a pullback in the market, really great opportunity to do some Roth conversion. Pay the taxes now, market goes back up, you're just piling this tax free money, which is great.

But a couple rules you have to be pay attention to is once it's moved into that Roth IRA, can't touch the money for five years. Okay. Very, very important. So don't say I'll move it in tax free and then two years later, I need the money. Well, you can take the money out, but there's going to be a 10% penalty and that kind of really defeats the whole purpose of the Roth conversion, because you've paid income tax and then you're paying the 10%.

Then the other thing important on a Roth conversion is you have to have the available cash to pay the taxes on it. So it's not really a great idea to do a Roth conversion and then, oh, I'll convert more and then use the proceeds to pay the taxes and all that. Have available cash on hand, pay the taxes through that one time thing. It's a pain upfront, but the long term gains on just growing money tax free is fantastic, especially as the market's down here.

So I just wanted to show you an opportunity, things to be thinking about. Don't always just think about the ups and downs of portfolio. It also presents opportunities with tax planning. So feel free to reach out to me if you have any questions. If you're nearing retirement, sign up for my Boarding for Railroad Retirement assessment, great stuff. I go through a lot of this stuff, because like I said, it's just not investments. Tax playing very, very important for a great railroad retirement. Please subscribe to my YouTube channel, click on the notifications bell to get the latest video. Share this with other railroaders. I do appreciate that. And until next time, everyone, please stay safe. Stay on track and take care. So long everybody. Bye.

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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.