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How to Build a Tax-Free Retirement with a Roth IRA Conversion

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The year 2010 marks a decisive year in which IRA owners may take advantage of a tax-planning opportunity yet unseen.  Every time a “change in the tax code” occurs, I ask myself, “What is the IRS and our government trying to get us to do?  What is their incentive to give US an incentive?”  Well, for one, our government both federal and state have major cash flow issues.  Instead of waiting until you are 59 1/2 years old to collect income taxes from your IRA or 401(k) retirement plan as you withdraw cash for retirement income…they’d like your money now within the next couple years.  A Roth IRA conversion may just be what the doctor ordered so you can take your tax-deferred retirement savings and pay taxes NOW, so you won’t have to later.  In other words, bite the tax-bullet now so later on, the money you take out from a Roth IRA never has to pass through Uncle Sam’s hands.  Before I go any further, did you realize that you actually have a “partnership” with your IRA or 401(k) retirement plan, with Uncle Sam?  As if trying to avoid losses from the stock market wasn’t enough, Uncle Sam (and Cousin Illinois, Florida or California…yeah, you get my point) are salivating at the chance to take a percentage of your cash when you start making retirement plan withdrawals.  They can’t wait to get your money in the form of federal and state income taxation.  Would you like to “buy-out” this partnership now so you can keep all your profits from your money, to yourself and your family?

Speaking of income taxes…with health-care reform before us, trillion-dollar stimulus and bailout plans that we eventually have to pay back as a country, where do you think income taxes in the future will be?  Lower, the same, or higher?  Ding, ding, ding, ding…our listeners, readers and attendees to our workshops ALL raise their hands to “HIGHER”.

Jeff Rose is a Registered Representative with and Securities offered through LPL Financial, Member FINRA/SIPC.

If so, they why would you want your money “tax-deferred” so that your money will be potentially taxed higher later in your life when you need your money the most?

I had the chance of interviewing Jeff Rose, Certified Financial Planner (CFP) on the Money Smart Radio show recently.  Please download the full interview podcast for free and do us all a favor.  Please share this post with friends and family who may own an IRA or 401(k) retirement plan if you think it may help them create a tax-free retirement income. (Pssst! Connect with Jeff Rose, CFP on Twitter too!)

Consider this scenario:

If you had saved up a million dollars ($1,000,000) and you needed to live on $100,000 of income per year, you may think in your mind that just as long as you get a 10% return each year, you will never have to tap into your principle (of $1,000,000) since you would be living off interest income (of 10%) from your portfolio each year.  Is this what most people have planned, at least in their head?


x 10% interest

= $100,000 income


But did you calculate federal and state income taxes into this equation, yet?

In this example…(the tax calculation is generalized but gets us in the ballpark, so before Mr. Smarty Pants jumps all over me, I’m just illustrating the big picture…so please consult with your tax advisor before you do anything)

$100,000 of income

– 33% federal/state income taxes (of course, this is an assumption of you being in a higher federal/state income tax bracket…of course check with your tax advisor)

= $67,000 net income

And since you paid off your mortgage (which is another subject I disagree with) and unless your name is Abraham and wife’s name is Sarah…you are not planning to have no more children in your 70s, you have very little income tax deductions anymore.  You have just found yourself, “In the Tax-Twilight Zone” where the money you will further lose to higher income taxes is real.

Therefore, if you needed to live off $100,000 per year, you would actually need to withdraw $150,000, pay taxes of $49,500 so you CAN bring home $100,000 in that year.

Jeff Rose, CFP breaks down tax-free retirement planning via Skype!


– $150,000 retirement income withdrawal

– $49,500 federal/state income taxes

= $100,500 net income

If that’s the case…how soon will your $1,000,000 retirement nest egg last before you run out of money?  (Yes, you would be tapping into the principle and the money you are withdrawing creates less interest income for you the following year).

You’d be broke in a little over 14 years.  Will you be ready to rejoin the workforce then?

Stay planning today, your financial destiny, freedom and independence relies on the choices you make now.

Top Financial Interviews CD Vol I: Please consider purchasing this CD which is a compilation of the top financial interviews after meeting with over 120 financial planning and business experts. Proceeds of this CD not only help build your financial library but enables us to do charitable outreach in our community.  Here’s an example – CLICK HERE

MONEY SMART COACHING: Would you like to find out if a ROTH IRA or ROTH IRA Conversion is right for you?  We are able to direct you to a wealth-building coach to take advantage of a free, complimentary 30 minute coaching session through a three-step, MoneyN’Motion process .  We are able to coaching you along using screen sharing technology during our call which makes it just like we were sitting there next to you with our computer. OR, you could always meet with someone, face-to-face, in person.  If you are interested, email us at [email protected] or call us at 708.686.2000 x1.

Currently there are "2 comments" on this Article:

  1. Mason Williams says:

    What a great interview! Thx for providing so much value to us guys! I need to call you for more details as I didn’t know this was available.

  2. Tyson Redgrove says:

    Tax-free retirement…thank you for sharing Matthew and Jeff. I will have to review my existing plan and find out what I have. Didn’t hear this at my job.

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