During the last few weeks, I've written about what people plan to do after retirement.
Today, I'm writing about what you should do financially so you can put those plans into action.
Several readers have recently had questions about individual retirement accounts, or IRAs.
"I am 52 with two-thirds of my retirement in an IRA," reader David wrote in an e-mail. "I'd like to move it to a Roth IRA so I know exactly how much I have, since all taxes will have been paid. Is it better to leave it where it is, or beneficial to convert it to a Roth?"
For help with this week's questions, I contacted Alan B. Tingey, principal at Cannon Tingey Investment Advisors in Salt Lake City.
Alan says that, assuming a person is eligible for such a conversion, he must consider several economic factors.
"The economic decision has largely to do with a comparison of the current tax bracket with the anticipated tax bracket at retirement," Alan wrote in an e-mail response to David's question. "A traditional IRA is a vehicle that allows pretax funds to grow tax-deferred until retirement at which time the entire distributions are taxed at the then ordinary income tax rate. Alternatively, a Roth IRA is a vehicle that allows after-tax funds to grow tax-free such that no taxes are due upon distribution.
"If an investor converts his traditional IRA into a Roth IRA, he must recognize the entire amount of the IRA as income in the year of conversion and pay the associated taxes; but the advantage comes at the time of distribution when no taxes are due."
The general rule, Alan wrote, is that the wider the gap between today's tax bracket and your anticipated tax bracket at retirement, the less incentive you have to convert today.
"For example, if your 52-year-old reader that is contemplating conversion to a Roth IRA is currently in a 35 percent combined tax bracket and anticipates dropping to a 22 percent combined bracket at retirement, it will most likely not be advantageous to convert," Alan wrote. "Alternatively, if his tax bracket is expected to stay at 35 percent through retirement, he should probably convert to a Roth now.
"On the other hand, if he is currently in a 23 percent bracket and anticipates dropping to a 20 percent bracket, conversion today seems advantageous; however, he needs to be aware that, depending on the size of his IRA, conversion alone may boost his marginal tax rate in the year he converts."
That's the general response, David, and I think it's a good one. You probably should seek detailed tax and legal counsel specific to your situation.
I've also had a few readers ask for more information about the "stretch IRA" concept.
"According to my adviser, you can leave an IRA to your spouse tax-free," Erin wrote. "However, you cannot leave it tax-free to anyone who is not your spouse (like your sister) unless it is a stretch IRA. I can't find anything about this on the Internet. Is this true?
"Also, I'm not really clear on what 'stretch' means. Does it mean you take a little of your IRA each month, rather than a lump-sum distribution? If that is all it is, do you have to do anything to an existing IRA to make it a stretch in advance of distribution time?"
Alan wrote that, when a surviving spouse is a beneficiary of a deceased husband's IRA, it becomes an inherited IRA in her name.
"Any minimum distribution requirements apply as if she had always been the owner of the IRA. ...," Alan wrote. "If, on the other hand, the deceased spouse had named his children as primary beneficiaries (which can only be done at the consent of the surviving spouse), the children are obligated to begin receiving distributions at the time of their father's death according to their own life expectancies."
A "stretch IRA" is not a type of retirement plan, Alan wrote, but is a marketing term that refers to maximizing the time over which required distributions are paid.
"It specifically refers to how you designate beneficiaries and what choices they make (distributions over life expectancies versus lump sum payouts) when they receive their inherited IRA," Alan wrote. "The 'stretching' can take place as a spouse is named as primary beneficiary with children as secondary beneficiaries.
"The inherited IRA passes to the spouse first with no immediate tax requirements ... and will eventually pass to the children, who will have lower distribution requirements because of longer life expectancies. The inherited IRAs for the children, if properly managed, may actually outlive them and allow wealth to be transferred to the next generation."
I hope that clears up the confusion, Erin.If you have a financial question, send it to [email protected] or to the Deseret Morning News, P.O. Box 1257, Salt Lake City, UT 84110.
E-mail: [email protected]