Do you want to pay more taxes this year?

Chad Hassinger |

By Steve Barrett, CFP®, AWMA®, AIF®, CPWA®
Vice President of Wealth Management

September 6, 2018


Do you want to pay more taxes this year?

I am guessing most of you would answer “no”.  In fact, I would expect everyone would like to pay less in taxes.  However, the new tax law reduced many of the individual tax brackets only through December 31, 2025 (barring any action by Congress or the President).  Therefore, it may make sense to pay taxes now in order to pay fewer taxes throughout your lifetime.

For those of you that have Traditional IRAs, 401(k) accounts, 403(b) accounts or other pre-tax retirement accounts, you may have the opportunity to convert part of those accounts to a Roth IRA at the current lower tax rates.  When you convert pre-tax retirement accounts to Roth accounts, the value of the conversion is taxed as ordinary income in the year you make the conversion.  However, once it is taxed and you satisfy the requirements, qualified distributions from those Roth IRA accounts are tax free and therefore will not be subject to the potentially higher future tax rates.  The benefits for many taxpayers could be significant throughout their lifetimes and their beneficiaries’ lifetimes because Roth IRAs have the potential for tax free growth and tax free distributions for decades.  

As we approach the end of the year, now is the time to talk with your financial advisor and tax professional to determine if this makes sense for you.  There are many questions to consider before you implement this strategy.  Do you believe you will be in a lower tax bracket in the future? If so, Roth conversions may not make sense for you. Do you have a Roth IRA yet?  If not, a conversion may be a good idea so that you have options regarding which asset (pre-tax like an IRA or post-tax like a Roth) to pull from in retirement.  Will the added income from converting some or all of your pre-tax retirement accounts to a Roth IRA cause you to:

1. Pay income taxes on more of your Social Security benefits?  
2. Push your income over the threshold that will increase your Medicare Part B premiums? 
3. Pay the Medicare surplus tax of 3.8% on your Net Investment Income?  
4. Lose certain tax credits?  
5. Pay higher tax rates on your qualified dividends and long-term capital gains?  
6. Eliminate your ability to make Roth IRA contributions in that year?  
7. Increase your state and local income tax liability?  

There are ways to minimize the tax impact of the Roth conversion, however.  You may be able to increase your itemized deductions or make qualified charitable distributions from your IRA.  

Overall, converting pre-tax retirement accounts to Roth accounts can yield significant long-term benefits to you and your family.  However, there is the potential of negative consequences of converting to a Roth without doing a detailed analysis of the specific situation.  If you haven’t had this conversation with your advisor yet, now is the time.

Unless otherwise expressly indicated, the opinions or views expressed in this article are the author's own and do not reflect, and may differ from, the opinions or views of Strategic Financial Group, LLC or others within Strategic Financial Group, LLC, including its officers, managers, owners, employees or other service providers.