As a kid, when your mom asked you to clean your room, pause your video game, or join her for dinner, you probably responded with something like, “Hold on a second” or “I’ll do it later.”
With that same attitude, you would be a very traditional accountant, a CPA, IRA Help“From day one of your training as an accountant you’re told to never pay tax – postpone, postpone, postpone,” he says.
These days, Slott jokingly calls himself a reformed accountant because he’s completely changed his approach to his clients’ tax burdens. “I call this the cardinal rule of ALWAYS: Always pay your lowest tax rate. Always keep more money in your pocket,” Slott says.
Because tax rates are so low now compared to the past, “taxes are at a discount right now,” Slott said. People can use this opportunity to consider moving money out of traditional accounts and into tax-free vehicles such as Roth IRAs, he added. “That’s where everything should be heading.”
While this may seem like it requires complicated planning, Slott says the idea behind it is simpler than you might think.
Traditional accounts, like 401(k)s and IRAs, allow you to deduct the amount you contribute in a given year from your taxable income.
In other words, you’re postponing paying taxes on some of your income that you’re saving. When you withdraw that money in retirement (and you have to start withdrawing it once you reach a certain age), you’ll owe income tax on it.
Roth accounts work the opposite way.
You put money into a Roth IRA or Roth 401(k) with money you’ve already paid taxes on. The money in the account grows tax-free. Then, when you’re 59 1/2 and have held the account for five years, you can withdraw your contributions and earnings when you retire without paying a cent to the government.
If you have most of your retirement assets in traditional accounts, you can move the funds into a matching Roth account through something called a Roth conversion, but because you didn’t pay tax on the funds up front, you’ll have to pay tax on the conversion.
The question of whether to use a traditional or Roth account generally comes down to whether you want to pay taxes now or later.
One common school of thought is that workers early in their careers should choose a Roth because they tend to make less and pay less tax, while higher earners should get an upfront tax credit.
Slott believes nearly everyone can benefit from saving in a Roth account because there are two main factors that drive up the amount of tax you pay in retirement, regardless of your personal tax rate.
1.of Portfolio Value Growth“The market has gone up like crazy. It’s not guaranteed, but historically the market has been erratic in going up and down, but has generally trended upwards,” Slott said.
If you’re saving in a Roth account, all of the earnings in the account can eventually be withdrawn tax-free.
For savers with traditional accounts, the more income their portfolio generates, the greater the tax burden they will pay in retirement.
“Taxes are going up,” Slott says. “Asset values are rising, which means a larger percentage ends up going to the US government, which is the special beneficiary of your retirement accounts.”
2. Historically low tax rates. Another big reason to pay tax on your Roth savings now instead of later is that tax rates are historically low.
For example, from 1951 to 1963, top tax rates hovered above 90 percent before dropping to 77 percent in 1964. Today, the top marginal tax rate is 37 percent. Slott noted that tax rates are unlikely to fall further across the board between now and retirement.
Tax rates were reduced to their current levels with the passage of the Tax Cuts and Jobs Act of 2017, but that set of tax cuts expires in 2025. Even if the next administration maintains current tax levels next year, the federal debt would still be growing and Congress would eventually have to address it, possibly by raising taxes, Slott said.
So even if you fall into a higher tax bracket right now, having at least some of your funds in a Roth account acts as a hedge in case your tax rates rise further.
For Slott, having a tax-free source of income in retirement provides the ultimate peace of mind. “I invest everything in tax-free assets,” he says. “I don’t have to worry about the uncertainty of how rising tax rates will affect my standard of living in retirement.”
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