Tips for Getting Your Financial Life in Order in Hard Times

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Mr. Slott is a big believer in converting traditional individual retirement accounts to Roth I.R.A.s. Roths are funded with after-tax dollars, meaning contributions are not tax-deductible. But once you start withdrawing funds, the money you put in the account, plus what it has earned, is tax-free.

But you will have to pay tax on the gains in your traditional retirement account when you convert it, since that money was growing tax-deferred, but he argues that it is worth it.

Well, maybe. First, that tax bill could be substantial. When you change from a traditional I.R.A. to a Roth, the amount you convert is added to your gross income for the year and you pay ordinary taxes on the conversion.

Second, you don’t really want to pay those additional taxes from your traditional I.R.A. Not only would that reduce the amount of money you will have for retirement, but if you are not yet age 59½, you will also be hit with a 10 percent early distribution penalty, unless certain limited conditions are met.

Mr. Slott does point all this out. But I wish he had been more forceful in explaining the downside of Roth conversions.

He does, however, offer some thoughtful tips.

For example, once you turn 72, you’re required to take your first minimum distribution from a traditional I.R.A. no later than April 1 of the following year. So, if you will turn 72 this coming July 15, you would have until April 1, 2022. (If you are scoring at home, your R.M.D. is determined by dividing your I.R.A.’s balance as of Dec. 31 of the previous year, 2021 in our example, by your life expectancy, as determined by the I.R.S.)

The natural inclination might be to defer taking the minimum distribution until next year. The problem, as Mr. Slott points out, is your second R.M.D. would be due no later than Dec. 31, 2022, so you would pay tax on two distributions next year.

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