Your IRA is an IOU to the IRS

What is the biggest debt item on your balance sheet?  Your mortgage?  A business loan?  Something else?  Are all your loans paid off and you think you don’t have debt?  If you have an IRA, 401(k) or other pre-tax retirement account, think again. 

Most people are not trained to look at their investments with an eye toward the taxes owed.  Taxes are a component of any investment, especially retirement accounts.  If your asset location includes Roth IRAs or Roth 401(k)s, you’ve paid tax on money going into the account and therefore, no further taxes are owed as long as you follow the IRS distribution rules.  If however, you are like so many others who have contributed and successfully grown pre-tax dollars in retirement accounts, taxation is inevitable, a “debt” of sorts, as our government has not yet had the opportunity to claim their share of your retirement account.  The good news is that you can strategize. 

What would you say, is the number one rule of tax planning?  Arguably, it’s to pay taxes at the lowest rate, whether now or in the future. With income forecasting, you can estimate what your marginal tax rates may be each year.  If your income puts you in a lower tax bracket now than you foresee you’ll be in the future, your best strategy may be to pay at least some of the taxes now.  If however, your future income looks level or may significantly dip in a given year or in multiple years to come, deferring the distributions from your pre-tax retirement accounts to your low taxation years may be your best strategy.  Just remember to count all sources of income that can hit your tax return.  Then again, if you foresee your retirement account passing on to your heirs, you’d want to take their tax situation into account, as well as the new 10-year rule whereby the account needs to be emptied within a decade of the original account owner’s death, if inherited by a non-eligible designated beneficiary (IRS term). 

To optimize your tax situation, strategies to consider would include contributions to pre-tax versus Roth accounts, conversions to Roth, optimal order of distribution when pulling money from your financial accounts (should be assessed annually), future Required Minimum Distributions (which are a tax-triggering requirement), and how distribution income may affect other areas of your life such as health insurance premium tax credits or Medicare premiums.

You have control over your tax strategizing, however, paying taxes associated with retirement accounts is inevitable.  Remember that when you review your financial statement, your IRA is an IOU to the IRS.

LouAnn Schulfer of Schulfer & Associates, LLC Wealth Management can be reached at (715) 343-9600 or louann.schulfer@lpl.com TheWealthInformationLady.com  SchulferAndAssociates.com , or louann.biz

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.

Traditional IRA account owners have considerations to make before performing a Roth IRA conversion. These primarily include income tax consequences on the converted amount in the year of conversion, withdrawal limitations from a Roth IRA, and income limitations for future contributions to a Roth IRA. In addition, if you are required to take a required minimum distribution (RMD) in the year you convert, you must do so before converting to a Roth IRA.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor. 

Securities and advisory services offered through LPL Financial, a Registered Investment Advisor.  Member FINRA/SIPC.