Stableford Capital Insights

The recent changes to tax laws promise many things, including an increase in the taxes some might pay. This is of special concern if you live in a high tax state, are a higher earner or are planning to retire soon. You want to keep as much of what you earn as possible, especially for when you will need it. To that end, there are two important tools to be aware of that can both minimize your taxes AND bolster your retirement investment plan.

Evolving IRAs

Roth IRAs are attractive because you make contributions post-tax, then withdraw the earnings tax-free (after you turn 50 and a half). This IRA also does not force you to take minimum distributions after you turn 70 and a half.But to qualify for a Roth IRA, you have to make under $135,000 if you are single or $199,000 if you are married (and filing jointly). This knocks out many higher earners pretty early in their careers.One option is the Backdoor Roth. You contribute to a traditional IRA (which does not have income limits) and then convert the IRA to a Roth. You can also convert some or all of an IRA account you already have (from previous years contributions) to a Roth.While this is actually one of the best ways to build up a significant investment over time, there is a downside. You pay taxes on the amount you convert, since the money is moving from a “tax-deferred” account to a “tax-free” account.If you convert with a big balance, this could actually push you into a higher tax bracket for the year that you converted the account. To avoid this, it may be better to split up the converted amount over a few years.The Tax Cuts and Jobs Act makes it easier, and a good time, to convert traditional IRAs to Roth IRAs because current federal income tax rates are low and will likely only get higher. Why not get taxed on the distribution for conversion now at the low rate, then withdraw later tax-free, when taxes are higher?Backdoor Roth points to keep in mind:

• To keep withdrawals tax-free, your account – including your converted account – must be open for at least five years (starting on the first day of the tax year you made your first contribution, or converted to a Roth).
• You may not make tax-free withdrawals until you are at least 59 and a half years old.
• The deadline for making a contribution is the due date of that year’s taxes, usually April 15 of the following year. So, you could make a contribution for the year 2018 by April 15, 2019.
• You cannot reverse the conversion (new in 2018).
• Consider the backdoor Roth if you think your tax rate during retirement will be similar or even higher than it is now.

Life Insurance as a Retirement Vehicle

Another option similar to a Roth is to use permanent life insurance as a retirement vehicle and open what Forbes Contributor David Rae calls a “Rich Person Roth.” By using a permanent life insurance policy, you can grow your retirement funds tax-free, even generating tax-free income. There are no income or contribution limits, and no penalty for retiring before you are 59 and a half.The lack of income restriction makes the Rich Person Roth ideal for those who earn too much for a traditional Roth IRA. And because women usually live longer than men, this account can be particularly beneficial to wealthy women. Their assets simply take that extra time to compound – and still tax-free.Are you playing catch up with your retirement investment plan in preparation of retiring soon (or for those early years when you didn’t/couldn’t save)? This type of account is great for that, too, since there are no contribution limits. You can contribute to your traditional retirement accounts in addition to a Rich Person Roth.Other benefits: there is an additional lump sum paid to your beneficiaries upon your death. And the tax-free income you can withdraw in the future will not push you into a higher tax bracket, nor will it increase your Medicare premiums.Despite its name, the Rich Person Roth is not just for the rich. But it typically is most beneficial when introduced into your retirement investment plan after you have contributed the maximum amount to your other retirement accounts, such as a traditional IRA, 401(k), etc.There are two sticking points to this account type. First, it must be setup properly and the administration fees to do so can be high. Secondly, someone that only sells life insurance may not fully understand how it fits in your financial plan.

What's in Your Retirement Investment Plan?

Depending on your situation, the backdoor Roth and Rich Person Roth benefits may far outweigh the risks. As with any retirement investment plan strategy, it’s important to consider all the pros and cons, along with your unique financial situation. There are many ways to save for retirement, including non-traditional strategies such as these and the cash balance pension plan we recently discussed. With these wealth management options, you have the potential to save more while reducing your future taxes.This is where an experienced financial advisor can really help guide you along your personal roadmap to you meet your specific goals. Stableford’s integrated advisory approach means we look at your entire financial picture, including your taxes, investments and retirement savings. To learn more about how to incorporate a Roth IRA or permanent life insurance policy into your retirement investment plan, contact a Stableford advisor today at 480.493.2300.