Industry Insights

Make The Most of Your Retirement Plan with a Roth

By October 18, 2022 No Comments

When planning for retirement, often the first thing that comes to mind is a 401(k) plan. However, there are many other retirement options available – the trick is finding the right one – or combination – for you. “When it comes to retirement, there’s no ‘one size fits all’,” says ScrogginsGrear Pension Director Tom Koch. “It’s important to work with an expert who can help you determine both your goals and your options so you can enjoy your golden years when they arrive.” In today’s often-volatile market, the best way to make the most of your time and money is by being well-informed so you can make educated decisions about your retirement and pensions.

Planning For Your Future

 

As you explore your retirement options as a business owner – and your company grows – keep in mind that a combination of investment plans is often the smartest way to go. For example, a Roth is a solid choice to accompany a 401(k) plan. The great thing about the Roth is that it’s an excellent tax shelter, helping eliminate the uncertainty of where tax rates will be when you retire. Perhaps even better, they can be a safe port in a market storm.

A great advisor will help you navigate troubled investment waters. “Most people are experiencing reduced values in their 401(k) plans right now thanks to a volatile market,” explains Koch. “The silver lining is that this may create an opportunity to convert a portion of your pre-tax 401(k) account to a Roth while the value is lower – and this results in less tax owed. The growth potential in a recovering market on the converted Roth assets then provides for earnings in a tax-free environment.”

 

Retirement Real Talk: The Benefits of a Roth

ScrogginsGrear is committed to providing excellent business solutions and advisory plans that offer optimal options and recommendations for clients’ specific retirement and pension needs. For those who operate privately held organizations, advisors often recommend a strategy that includes a Roth IRA.

“There are plenty of benefits to including a Roth. While the tax advantage is certainly the benefit that gets the most attention, it’s far from the only one,” Koch tells us. Let’s take a closer look.

  • Tax-free distribution on qualified distributions. The most obvious benefit is again the tax shelter. While a traditional IRA offers a tax break up front in that contributions are deductible the year you make them, you will owe taxes on your earnings when you pull them out on the other end. With a Roth, you’ll wait a while for the tax savings (Roth contributions are not deductible), but you’ll get them when you probably need them most – when you need to start living on your earnings. When you start making withdrawals in retirement, that money is all yours. That’s especially comforting when your tax rate is likely to be much higher at retirement age than it is now.
  • Easier distribution planning for your heirs. In contrast to money left in a 401(k) or a traditional IRA, which require heirs to pay taxes on withdrawals, distributions from an inherited Roth IRA are tax-free.
  • No penalty for late withdrawals. While a traditional IRA requires you to begin withdrawals at age 72, a Roth has no such rules. That means your investments can grow tax-free for as long as you want, and you’re not locked into cashing out investments at a loss in a down market just because your birthdate happens to be in a certain year.
  • Accessible in an emergency. In a perfect world, our retirement savings stay safely tucked away, quietly growing until our golden years. But unfortunately, real life has a way rearing its head, and financial emergencies arise. While most retirement plans have extremely stiff penalties for early withdrawals, a Roth is there if you need it earlier than expected. As long as you withdraw from your contributions and not your earnings, you’ll avoid both taxes and penalties.

Following the Rules on Roth Conversions

As our expert Tom Koch mentioned earlier, an existing 401(k) may be partially converted to a Roth IRA. But as always, you’ll want to do so under the guidance of an expert. While it’s a smart option, it’s not without its own set of potentially tricky rules.

  • You’ll need an amendment. Many 401(k) plans provide for an “in-plan Roth conversion” with an amendment to the plan document. Participants may convert their entire plan balance or just a portion – but once it’s done, it cannot be reversed. That’s why you want to be sure a trusted advisor who is up-to-the-minute on retirement and tax planning walks you through your options and helps you find the one that’s best for your specific situation.
  • Income taxes are due on the conversion. Kock recommends paying those from personal funds so as not to dilute the Roth assets in the plan.
  • Qualified distributions are tax-free, including earnings, provided the distribution does not occur before five years after the conversion AND you’ve reached the age of 59 and a half. This is known as the Five-Year Rule.

If the participant’s employment ends, Roth funds may be rolled to an individual Roth IRA. The Five-Year Rule then applies to the first deposit in the Roth IRA, and the age requirement still applies.

What Are Your Next Steps?

There’s no better time than now to elevate your investments and take the next step toward your retirement, and ScrogginsGrear is here to help. Our retirement and pension planning experts bring decades of experience and in-depth knowledge specific to medical and dental practices, privately held businesses, and non-profit organizations to work for you. If you’d like to explore your options for yourself and your employees, please contact Page Helmick at 513.672.4361 or phelmick@scrogginsgrear.com.