Tax Strategy
From tax deferred
to tax free.
Every dollar in a traditional IRA or 401(k) has a partner in it: the IRS. A planned, multi year Roth conversion moves money to the tax free side while you still control the timing, and Pennsylvania makes that easier than almost anywhere else.
There is a window. It closes at 73.
From 59 and a half, you can take money out of a retirement account without the early withdrawal penalty. At 73, the government starts making you take it out, through required minimum distributions, whether you need the money or not. Those forced withdrawals are taxed as income and tend to land in exactly the years you wanted your tax bill to be small.
The years in between are the conversion window. Each year Jim looks at how much can move from a traditional account to a Roth without pushing you into a higher bracket than necessary. You pay the tax now, at a rate you chose, and that money grows and comes out tax free for the rest of your life.
Why Pennsylvania is a good place to do this.
Pennsylvania is one of a handful of states that does not tax most retirement account distributions for retirees. A conversion here is a federal tax decision only, which is a very different math problem from a high tax state where the state takes its cut on top. As Jim puts it, you still have to pay the piper, but in Pennsylvania the piper is a lot smaller.
"How do we get you from tax deferred to tax free, and how do we do it most efficiently? That's the whole question."
What your heirs inherit.
A traditional IRA left to your children passes a tax bill along with it. Under current law most non spouse beneficiaries have to empty an inherited account within ten years, usually during their own peak earning years. A Roth passes tax free. Conversions are as much a legacy decision as a tax one, which is why Jim plans the two together.
How Jim works on this.
- A full look at what you hold, where it sits and what your RMDs would look like at 73 if nothing changes.
- A year by year conversion schedule sized to your brackets, revisited every year.
- Coordination with your CPA, in the same meeting if you like, so the conversion and your annual tax plan agree.
- Straight talk. If a conversion does not make sense for you, Jim says so first.
American Retirement Pros does not provide tax or legal advice. Jim works alongside your tax professional, and the numbers below the line are always yours to confirm with them.
Common questions about tax strategy
Q.01Does a Roth conversion make sense for everyone?
No. It depends on your current bracket, your expected bracket later, how long the money can stay invested, and whether you can pay the tax from outside the account. Jim runs your numbers before anyone decides anything.
Q.02Will I owe Pennsylvania tax on the conversion?
For most retirees Pennsylvania does not tax retirement account distributions, which is one reason the strategy works so well here. Federal tax still applies in the year of the conversion. Your CPA confirms the details for your situation.
Q.03What are required minimum distributions?
Withdrawals the IRS requires you to take from traditional retirement accounts each year once you reach 73. They are taxed as ordinary income, and they grow as a percentage of the account as you age.
Shrink the IRS's share.
On your schedule.
Bring your most recent statements and last year's return. Jim will show you what your RMDs would look like and what a conversion plan could change.
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