Stop Traditional 401k Contributions

Your 401k is a shared asset. Your share this account with the IRS.

The IRS will decide in the future (when you take it out) how much they will take at distribution.

That’s right, your Traditional IRA(‘s) or 401k(‘s) are assets whose balance you chose to share with the United States Treasury.

If your balance is $1 million dollars, $300,000+ may be waiting to go to Uncle Sam. Growing your 401k or IRA is growing the amount you donate to Uncle Sam.

The fantastic Trump tax cuts are set to expire at the end of 2025 and unless they are extended, your best chance to convert these accounts and pay the income tax now rather than later will be gone.

For now, our federal income tax rates are lower than they have ever been. We now have a $31+ trillion national debt and Social Security and Medicare are on the brink of complete blow up. Do you really think part of the solution won’t be higher income tax rates?

Sadly, it’s true most Americans have little or no retirement savings to worry about, but for those who have high six or seven figure balances, planning is well worth it!

The potential strategy includes, stop contributing to these shared plans. Instead, use Roth 401k option. You still get the employer match if there is a match.

The potential solutions:

Look into converting your Traditional (tax-deferred plans) 401k’s and IRA’s to Roth plans.

How this works:

It’s simple, you pay income tax on what you convert from Traditional IRA’s and 401k’s to Roth accounts.

How much should you convert each year and what are the tax consequences?

1. Start by looking at last year’s tax return and see where your taxable income is likely to fall for 2024. I have tax software that will be very helpful in figuring this all out. Contact me.
2. Review the federal tax table below and see the range where your “taxable income” falls.
3. Your taxable income range is what is known as your “marginal tax bracket or rate” and signals the rate your next dollar of income will be taxed.

Example:

Your taxable income for 2024 is $250,000.

That would put you in the 24% marginal bracket.

The top of that bracket range is $383,900. That means the next ($383,900-$250,000) $133,900 of income would be federally taxed at 24%. It may be advisable to convert $133,900 to a Roth IRA from old IRA’s and pay the tax now.

What are the benefits of the Roth IRA?

Take Advantage of Tax-Free Roth IRA Article Link

Converting any portion to a Roth IRA means paying income tax now at the current tax rate rather than later at whatever future tax rates may be.

Other benefits of Roth IRA include:

1. The growth of your account will never be taxed again (including at distribution)
2. You will not be required to make annual distributions at age 73 (currently IRA’s are mandated to begin distributing at age 73)
3. Your beneficiary(s) withdrawals are not taxed. Conversely, when children inherit your Traditional IRA’s they pay the tax as ordinary income presumably in their highest earning years. Due to the new Secure Act, your beneficiaries will be required to take the money out within 10 years, potentially at their highest tax bracket years.
4. Medicare Part B premiums go up as your income goes up in retirement. So having tax-free income from a Roth IRA could help you save money on Medicare premiums. 

Medicare Premiums based on income link

For people that have significant retirement balances I suggest you strongly consider ONLY using Roth 401k or Roth IRA’s going forward. You will love have retirement accounts that you can pull from income tax-free when you retire!

I have tax software we can use and figure out what the tax consequences of converting to Roth’s.

You have until 12/31 to make any conversions for this year, but let’s not wait until the last minute to discuss.

Email – brad@fortunefinancialgroup.com

Office – 630-942-9007

Why I Love My Roth 401k