In a previous Roth conversion article, we discussed the importance of timing when it comes to Roth conversions. There are other Roth benefits, such as not having to worry about required minimum distributions (RMDs), and being able to take out qualifying contributions & conversions at any time. However, there is a danger of overpaying for that privilege.
Let’s imagine a household currently in the highest tax bracket (39.6%). They plan to eventually retire to the 15% tax bracket. A Roth conversion today would cost that household more than twice as much than if they waited until they had to take RMDs. Conversely, a family that is currently in the 15% bracket might save thousands of dollars by maximizing their conversions in their current tax bracket.
This article aims to discuss:
- Why a military family’s tax bracket might change over time
- When you might want to consider Roth conversions
- When you might want to delay Roth conversions
- Why you might want to hire a tax professional to help with tax planning
- Why you might never want to convert to a Roth account at all
This article was suggested to me by a long-time shipmate & colleague (thanks, Dave!). Over my life, I’ve refinanced several times using an IRRRL, when it made financial sense for me to do so. However, it wasn’t until I got this question that I thought about researching it a little more for an article. Hopefully, this article will achieve a couple of things:
- Provide some information without dangling a mortgage-application process in front of your nose (I hate learning about how something works from someone who has something to gain from it)
- Give you some perspective beyond what the VA’s website tells you. It’s good information, but not all of it is accurate. Also, sometimes it helps to have a real-life example or two. That way, you can make your own decision based upon the facts in your own financial situation.
I remember the first time I received a financial plan. Actually, it was for my mother. It was a while ago, before I decided to become a financial planner myself, and is probably one of the reasons why I did so. My mother had inherited some money from my grandmother, and after a couple of years of waiting for the broker to do anything, we decided that we were going to move it. I’d researched some financial planners in the area, and decided to work with an hourly financial planner we’d found. For $800, she presented us with a beautifully designed, articulate financial plan.
My mother paid the fee, smiled at the planner, and graciously thanked her for her work. As we left, she turned to me and said, “What am I going to do with this? I want you to tell me what we’re going to do, and to help me do it.” I didn’t realize it at the time, but that statement highlighted one of the key differences between a financial plan and financial planning. Continue reading
In a previous article, I wrote about the decision to either take terminal leave or sell it back. Basically, it boils down to the opportunity costs—what are you going to do with that terminal leave if you choose to take it? Personal reasons aside (like taking a well-deserved break), if you have nothing better to do with your leave, then you’re better off financially just selling it. In this article, we’ll discuss 3 ways you can make the most of your terminal leave. Continue reading
For a lot of military households, tax preparation is simple, straightforward, and free. Every year, just collect the paperwork and head down to the VITA (Volunteer Income Tax Assistance) office, and the staff can help you do your taxes. Or, if you’d rather do it on your own, you can either use a software provider such as TurboTax, or go to the IRS FreeFile website. The IRS also has a link to find free state filing options, based upon certain eligibility criteria.
However, you often get what you pay for. Over the course of your military career, you might find yourself in situations where the free offerings no longer make sense. Below are three types of situations in which you may want to hire your own tax professional. Continue reading
Most military members should know about the free tax filing assistance programs that are available. These programs range from free access to tax software to working with volunteers who actually prepare tax returns. Many bases even continue this benefit for retirees.
However, one of the best things you can learn to do is look beyond this year’s tax return and start tax planning. For servicemembers and their families, there are many military-specific tax benefits, guidelines, and other ‘need to know’ items. IRS Publication 3: Armed Forces Tax Guide is one of the best resources for this tax information. Continue reading
As you transition from active service, life insurance is an important, yet overlooked aspect of your post-military financial planning. In a previous article, I discussed five considerations about your military life insurance needs. To build on those relevant points, this article focuses on things that may not present themselves until your transition. Continue reading
The financial planning landscape can be pretty confusing. Not only is it difficult to figure out who has your best interests in mind (as the debate over the fiduciary standard is pretty confusing), but it’s also difficult to figure out who is in the business of EARNING their fee, vice collecting it. This article should serve as a quick snapshot (and starting point for discussions) on what a consumer should consider to be the minimum standard for hiring a financial planner. Meeting these criteria doesn’t necessarily mean success, but failing to do so should prompt you to keep looking for someone else. Continue reading
I’ve written several articles about Roth conversions, particularly tax planning considerations & marginal tax rate impacts. This article serves as a case study to help visualize how a Roth conversion strategy could work, and how the tax liability can fluctuate based upon the timing of Roth conversions. There are many variables that affect tax liability for Roth conversions, including:
- Time horizon: The more time you have before required minimum distributions (RMDs) begin, the more years you can spread conversions. This can allow you to maximize conversions during years with low taxable income & lower conversions during years of high taxable income
- Amount to be converted
- Total taxable income: The lower your taxable income, the more you can take advantage of conversions at the lowest tax brackets. Additionally, the lower your income is WITHIN your current bracket, the more you can convert without spilling over into a higher bracket
- Investment returns on the traditional account: The higher your investment returns, the more you will have to convert. For example, if you start with $500,000, you not only have to account for that amount, but for the future gains in that account.
- We’re also disregarding the Medicare Tax on Investment Income, which is 3.8% of income over $250K.
In this article, we’ll use a fictional example of a military family looking to do a Roth conversion from their traditional TSP account to an IRA as they transition to post-military life. However, we won’t focus on the WHY. Instead, we will solely focus on three ways they could do so, and which manner presents the lowest overall tax liability–the HOW.