“"It's mine, all mine!" cartoon character Daffy Duck wails, spit flying and lisp in full effect, as he stuffs Bugs Bunny down a rabbit hole in hopes of keeping the pile of treasure all to himself.”
Baby boomers can learn a lesson from Daffy Duck, with the treasure of gold coins as your Individual Retirement Account. A traditional IRA is funded with pre-tax dollars. This can help lower your taxable income. The contributions also grow tax free, according to CNBC in “Boomers: Take a page from Daffy Duck and his stash of gold.”
Nevertheless, there are still taxes when you withdraw money. The taxes typically begin on withdrawals in retirement, sometime after you reach age 59½ to avoid early withdrawal penalties. As a result, you should consider a Roth IRA. It’s funded with post-tax dollars and the contributions also grow tax-free. However, the withdrawals are not taxed—unlike a traditional IRA.
Don’t just select one type of IRA over another, but rather use them in concert to mitigate taxes now, as well as, in retirement. A sound strategy is to divide your money into three groups: (i) tax-deferred accounts, like a 401(k) or a traditional IRA, (ii) a tax-free Roth and (iii) taxable accounts such as brokerage or savings accounts. This diversification gives you the flexibility to pick where to withdraw funds to take advantage of the tax laws as they exist in the future.
Can I open a Roth? Couples earning more than $196,000 and singles making $133,000 are not eligible to open Roth accounts directly. An option for these folks is a conversion. That’s where you transfer the money from your regular IRA to a Roth. However, this will be taxed at your ordinary income rate, so plan ahead.
When do I make the switch? The optimal time to convert an IRA is when you have little or no income. For example, this would be if you take a leave of absence from work, are between jobs or just retired. Each of these times present opportunities, because your tax bracket may be lower.
How much do I move? It's your call as to how much money to move from a regular IRA to a Roth each year. Therefore, you have some flexibility to avoid some higher taxes. You don’t want to convert everything at once, since this would put you into a higher tax bracket. Remember, the additional converted income is taxable.
How does it fit into my estate planning? The tax differences between Roth IRAs and traditional IRAs make them an effective estate planning tool. Consider a Roth conversion, if you want the money to go to your children and grandchildren. Children and grandchildren who inherit a Roth, can take money out over their lifetime, giving them a long time to get that money tax free.
Reference: CNBC (March 16, 2017) “Boomers: Take a page from Daffy Duck and his stash of gold”