Is it Time to End your IRA Partnership with Uncle Sam?

Roth IRAs are favored by Ed Slott, a nationally recognized retirement and IRA expert, with whom I worked in the past as one of his Elite IRA Advisors.  He frequently appears on PBS fundraisers and teaches people how to make the most of their retirement savings. Unlike a regular IRA, the Roth IRA provides no tax deduction when you contribute but allows tax-free income when you take the money out.

I worked with Ed Slott as an Elite IRA Advisor from 2010-2012. I am on the left, Ed on the right

Most people need to consider either starting a Roth IRA or converting part of an existing IRA to a Roth. With the latest round of government spending in the COVID 19 pandemic, taxes will likely go up. If your investments are in a Roth IRA, you pay no tax when you take distributions.  The government does not require you to take required minimum distributions, which sometimes push you up to a higher tax bracket. As Ed Slott likes to say, "The government is your partner with a standard IRA. When you take distributions, so does Uncle Sam. To make matters worse, Uncle Sam decides how much you get and how much he gets. When taxes go up, as they inevitably will, your partner is going to get a bigger piece."

The only way to end this partnership is to have a Roth IRA. If you convert part of your existing IRA, you will owe tax on the amount you convert. You don't want to push yourself into a higher tax bracket upon conversion, so you need to discuss this strategy with your tax accountant.

One idea to consider is to put a stock with very high growth potential into a Roth. For example, let's say you have a favorite biotech stock you are holding, which can rise tenfold if it is successful. Let's say it rises from $5 to $50, and you own 5000 shares. Your account grows to $250,000! You can take the entire amount out and pay no tax. On the other hand, If that same $250,000 was still in your regular IRA, and taxes rose to 50%, your partner Uncle Sam would get half, and you would get half.

For simplicity's sake, let's assume taxes stay at 35% from the time you convert $25,000 to a Roth IRA to the time you sell your biotech stock.  You will pay $8750 in taxes at the time of conversion.  Then your biotech company gets FDA approval and runs up to $50.  Your Roth IRA account is now worth $250,000!  If you had left that stock in the standard IRA and sold it and took the money out, you would pay $87,5000 in taxes and net $162,500.   In a Roth IRA, you would keep the entire $250,000 and pay no tax!  I know this is an extreme example, but I am trying to illustrate one of many ways a Roth IRA can provide significant advantages to your financial health.