IRA Strategies

Individual Retirement Accounts can be a great tool retirees can use to manage tax liability and provide income for family members after they pass on.  The main strategies which will be discussed here are Roth conversions and Stretch IRAs.

What is a Roth conversion?

A Roth conversion can solve the problems inherent in traditional IRAs by converting the money in a traditional IRA into a Roth IRA, which has different tax deferment benefits.  Many people at or approaching retirement age hold traditional IRAs, which allow you to defer paying taxes on the money in the account until it is withdrawn.  What these people may not know is that by putting that money into a Roth IRA and paying the taxes up front, it can grow tax-free for their lifetime.

The Downside of Traditional IRAs

One problem with traditional IRAs is that they require a retiree to begin taking distributions starting in the calendar year they reach age 70.5.  Many retirees do not need to start drawing on their IRAs until much later if, for example, they are still working when they reach that age.  Another problem is that traditional IRA withdrawals are taxed as ordinary income, and these are taken at a time when retirees need to keep their tax liability as low as possible.  Both of these problems can be solved with a Roth conversion.  You’ll be happy to know the process is really quite simple.

Roth conversion method

  • Contact the institution that holds your account
  • Request a Roth conversion form and any other necessary paperwork your institution may require
  • Fill it out and return it to your institution

After the conversion, you will have to pay taxes on the full amount converted to the Roth, but it also means you will not have to pay taxes on any future withdrawals taken from the account (assuming you are over age 59.5 and have satisfied the 5-year seasoning period).  You have, in effect, vaccinated your IRA against future taxation by paying the tax now, when taxes are at a historically low rate.  This leaves your IRA the ability to grow tax-free from the day you do the conversion forward and also allows you to take tax free withdrawals from your account.

Stretch IRAs

Stretching an IRA gives a retiree the ability to provide a lifetime of guaranteed income to a beneficiary or beneficiaries.  This is accomplished by passing the balance of your IRA onto an heir (other than a spouse), who must then begin taking required minimum distributions from the account.  This is known as “stretching” the IRA, because you are essentially taking an IRA designed to last only through retirement and stretching it to last an entire lifetime (based on the heir’s life expectancy).  It is important to note that the designated beneficiary could take the money out in any amount (including a lump sum) unless the owner of the account takes measures to prevent this scenario.

In any case, these distributions can then be used for daily living expenses, or invested in other ways.  For a retiree who doesn’t plan to live long enough to use all the money in his or her IRA, this is a great way to provide benefits for surviving family members.

First Senior Financial Group Can Help

The staff at First Senior Financial Group works tirelessly to stay ahead of the latest changes to laws concerning IRAs.  Our educators can help you decide the best strategy for your IRA when you make the transition into retirement.


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