Date: January 23, 2023

How a Roth Conversion Could Lower Your Tax Costs

Now more than ever, even high-net-worth individuals should be looking for ways to reduce taxes. Inflation, like market volatility, affects everyone: Having a million dollars in a savings account today may buy more goods and services than it could tomorrow. With this in mind, a Roth conversion could be an option worth exploring if you want to reap the benefits of reduced taxes and greater financial flexibility. 

In a sense, this allows you to have a little cake and eat it, too: By transferring some or all of your existing IRA holdings into a Roth, you can lower your future taxable income while still enjoying an IRA’s advantages, such as tax-deferred growth and increased return potential. 

This article discusses the following:

  • Taxes are likely to go up with SS increases
  • Can COLAs keep up with inflation long-term?
  • A Roth conversion may help you save money
  • The sooner we start, the more money we may save

Taxes Are Likely To Go Up With SS Increases

In 2023, some Social Security beneficiaries will receive a cost-of-living adjustment (COLA) of 8.7 percent or more. While this is good news for retirees who depend on it, higher taxes are almost certain to follow (especially for the affluent). Other seniors may not like how the additional income could also bump them into a higher tax bracket.

Notice, however, that I’ve said “could” and not “will:” Even in the top tax bracket, the IRS gets access to 85% of your benefits for taxation, but nothing more. Provisional income normally includes only about half of a recipient’s annual benefit amount. So, the difference may be fairly minimal. 

Either way, with a bear market chasing the last year out—and inflation still stubbornly high, the surest way to keep your nest egg from shrinking may be to fortify it. I’ll discuss protecting your assets in another article. Today, we’re focused on your tax liability (or how much you’re assessed to owe).

You don’t want to get hit with higher taxes and losses to your portfolio, where the worst to happen at the same time. I see no reason to assume that 2023 will be all bad news, but we may have an economic river to cross over the months before we see improvement in all sectors.


Confused by Changes to Social Security? We’ve Written an Article To Help You Make Sense of It


Can COLAs Keep Up With Inflation, Long-Term?

A lot of non-affluent retirees have long relied on Social Security’s COLAs to help them keep up with inflation (with better results, sometimes, than others). However, the extent of these raises beyond 2023 is uncertain. Recent projections suggest that seniors may not be able to count on this safeguard by the end of this decade or beyond. 

It bears repeating that, as I’ve said before, I don’t think Social Security is likely to vanish entirely. We just can’t say how solvent it will be (any more than I could guess the weather for the World Series nights in 2028). Generally speaking, when inflation runs high, it has a nasty habit of outpacing COLAs over time.

Unfortunately, this means that some retirees could easily fall behind on their desired quality of life. That’s why those receiving Social Security benefits should consider other forms of income, such as IRA accounts or inflation-resistant investments. 

A Roth Conversion May Help You Save Money

Taking advantage of a Roth conversion can potentially provide an effective tool for keeping your wealth growing while reducing your income tax liability. Whether you have a high income, investments with large capital gains, or both, you may benefit long-term.

The chief advantage of a Roth conversion is that it allows you to pay taxes upfront on your contributions. This allows your investments to grow tax free and then all future  withdrawals to be taxed at zero percent once you start withdrawing the money during retirement. This option could lead to significant savings—especially when tax season rolls around. 

The money which was converted could have been subject to higher marginal rates and additional taxes when it was withdrawn in the future. In other words, a Roth conversion can be used strategically to reduce or avoid hefty taxes when wealth is accumulated. It’s a great way for individuals and families to keep more of what they earn.

Furthermore, transfers are not subject to capital gains taxes, and some states may offer additional exemptions on year-to-year contributions that were previously taxed. Tax-free distributions made after age 59 1/2 not only potentially increase wealth but can also provide greater financial freedom for retirees, as well. 

There’s a lot to be said for funds that can be accessed without concern for additional taxes or penalties. This is only one of many ways in which you could leverage high-net-worth retirement planning in Connecticut.

The Sooner We Start, the More Money We May Save

 Roth conversion investfortomorrow.comA Roth Conversion can be a great way to potentially maintain wealth creation despite inflation, helping you build your wealth faster than you ever thought possible. In fact, converting early and often may provide opportunities to secure your financial future and minimize taxes down the road. 

Using proven fiduciary wealth management services to assist you with your Roth conversions now could potentially save you thousands of dollars (or more) in the long run. However, a comprehensive approach is usually the most productive. Investing, saving, and tax strategies are all important aspects of financial planning. 

Who wouldn’t want to retire with confidence in Woodbridge, Connecticut? Sometimes it may seem as though the more successful you are, the less time you get to relax and enjoy it. However, you don’t have to worry your way to your golden years. Sitting down with a seasoned professional can give you the best chance to make well-informed decisions. 

The Heritage Capital team has the knowledge and experience necessary to help you make solid financial plans for your future and your family’s security. We specialize in tax planning, retirement planning, asset management, and estate planning for high-net-worth individuals. Contact us or schedule a free consultation to learn more.

plan a bulletproof retirement


Paul Schatz, President, Heritage Capital