The Problems with Traditional IRAs
-- Taxes Coming, Options Limited:

Traditional IRAs (Investment Retirement Accounts) are tax-DEFERRED -- but NOT tax-FREE. When you start taking money out of them, that is counted as income in your tax return, and taxes must be paid on it.

To make matters worse, this IRA-withdrawal income is above and beyond your other income, possibly pushing you into a higher income-tax bracket -- forcing you to pay a higher tax rate on ALL your income that year (including the "income" from withdrawing money from your tax-deferred IRA account).

And, though you may not want to withdraw money from your IRA during high-tax years, a traditional IRA account has RMD (required minimum disteribution) requirements, requiring that you withdraw (as income) a substantial percentage of your IRA every year after you turn about 70. (To be exact, the RMDs start the year you turn 70 ½.)

Consequently, whether you want to or not, you have to start taking money out of the traditional IRA after age 70, and pay taxes on that withdrawal (and all other taxable income that year) at whatever tax rate applies at the time. (If you don't voluntarily take the RMD out of your IRA, then the IRS automatically taxes you for a whopping half of the RMD amount.)

Moving from normal IRA to Roth IRA:

If you move your IRA money -- to a Roth IRA account, instead -- the move of the money is taxed immediately (in that year's taxes). But because taxes are so low right now, THIS is the ideal time to make that move. Take the minor tax hit for the transfer, now, and then -- from that point forward (in all subsequent years) -- the money you've moved into in your Roth IRA is NEVER taxable again.

If you take money out of the Roth IRA anytime in the future, that money is not to be figured as taxable income. Consequently, you'll not only avoid having to pay taxes on it at the time, but you'll also not be enlarging your OVERALL taxable income for that year -- so your Roth IRA withdrawals won't push your TOTAL income into a higher tax-bracket.

That's even more important than is obvious, because IRA and Roth IRA withdrawals are often done at some point of real need, in retirement -- at a time when you're hurting financially, and really need the money. That's no time to also have to pay additional taxes.

Another nifty benefit of Roth IRAs, over conventional IRAs, is that a Roth IRA has NO annual RMDs, ever. If you don't want to take ANY of the money out at age 70½, or for years thereafter, you don't have to -- leaving you in a stronger financial position in later life.

This makes a lot of sense as seniors are often working and earning later in life, sometimes well into their 70s, and are living longer (often well into their 80s, or beyond) -- pushing their years of real financial need farther back than their early 70s (when conventional IRAs must begin to be depleted).

In short, Slott recommends moving your money, now, from a traditional IRA to a Roth IRA, while the total lifetime tax hit is at the lowest it will ever be -- freeing you for tax-free income from it, on your own schedule, any time over the rest of your life.

Note, however, that there are complex rules guiding when, at what pace and under what conditions you can make such a move. People under 60, for instance, cannot instantly move the money without sharp penalties. Some circumstances may require you to move the money in stages, over as many as five years. Get expert guidance in this process.

Another tax shelter for seniors is what Ed Slott describes as non-taxable life insurance.

Slott acknowledges that people tend to think of life insurance policies, on themselves, as money for their survivors. However, Slott notes, some policies allow policyholders to take out some money from their insurance policy -- tax free -- while they are still alive.

Using that loophole, Slott encourages seniors to use life insurance as a tax-sheltered savings account -- shifting money there from taxable sources.

Slott is particular about which types of insurance are suitable for this purpose, noting that others are counter-productive investments. In fact, he refers to the "right" types of life insurance as "savings" rather than "investment."

Finally, Slott says that another tax shelter is annuities -- which allow you to invest money that can then be withdrawn (or is paid out automatically), sometimes in amounts and timing of your choosing, tax-free.

Moreover, a renewable annuity allows you to take income from the annuity, without halting its ability to grow again. In fact, some annuities may allow you to return money to the annuity, to increase its interest-driven compounding growth -- a source of income that can -- if you only take modest amounts of it as income -- continue to grow even as you consume it.

Slott emphasizes that, in retirement years, INCOME is more important that SAVINGS -- and implies that annuities are an ideal tax-sheltered source of regular income.

Net effects:

Slott indicates that the net effect of these various tax-shelter / tax-avoidance instruments, for retirement wealth, is to provide you with a reduced rate of erosion of your assets in later life.

The elimination of tax-erosion of your money in these investments (or "savings" or "income"), ensures that the principal amount remains full, and any interest accumulation, now tax-free, has a far greater compounding effect over time.

Finally, these money havens allow greater flexibility in how and when you can make withdrawals, and use the money.

As a consequence, Slott indicates, these three tax shelters for seniors...

• Roth IRAs (Investment Retirement Accounts)
• Non-taxed life insurance
• Annuities (renewable)

...are ideal places to move your money, now, while the tax consequences are the lowest they will likely ever be in your lifetime.

WARNING:  Don't do this alone:

Slott -- who also has a program for certifying IRA consultants -- urges that you seek expert assistance in making these changes.

In other sources, as well, the advice is clear: These kinds of changes to your finances must be done with expert knowledge of the current tax rules, and the intricate legal and financial rules set up by Congress and others for these transactions.

One minor technical mistake could cause you massive, even catastrophic, financial losses -- and even constrain your access to your own money.

There is always room to be somewhat cynical about Slott's motives in urging you to find "competent" help -- without mentioning that part of his business is certifiying people as "competent" guides in this field. But, even so, many other sources warn of the extreme financial and legal dangers of sloppy re-investment.

Get a certified financial advisor, preferably a CPA (Certified Public Accountant), but also with some other credentials (such as a CFP -- Certified Financial Planner), to guide you through the process. I consider a reputable estate-planning attorney to be a good guide to finding a suitable financial planner.

Beware those who are intent on selling you some other instruments (for which they get a piece of your payment) -- they're operating with a confict-of-interest.

But an expert who knows what they're doing may make your future much, much brighter -- while there's still time to do it. ~RH

(CAUTION: Finance and tax articles are often very date-sensitive. Laws and economics change rapidly. Seek current expert advice before acting on the guidance in these articles.):

RECENT ARTICLES:

2018