retirement health care by age 65. If you start contributing tax-free growth, thereby maximizing the after-tax funds
the maximum as early as age 40, you could have saved eventually available for you or your heirs.
almost $270,000. These funds will continue to grow tax-
free in retirement until you need them.
Another significant benefit of a Roth IRA or Roth 401(k)
is tax diversification. For example, you may choose to take
If you don’t use HSA funds in full before you die, excess taxable distributions up to a certain amount and then tax-
funds are subject to income tax, but will be otherwise free distributions to avoid a higher income tax bracket.
available for your heirs.
If you are a high-income taxpayer, Roth IRA distributions
Consider a Roth IRA conversion
are not considered income when determining thresholds
The typical dogma says that converting an IRA or for increased Medicare premium charges or the 3.8
traditional 401(k) to a Roth IRA does not make sense if percent income tax surcharge on investment gain. If
you expect your tax rate in retirement to be lower than at your income is more modest, Roth IRA distributions
the time of conversion. However, lesser known benefits are not considered income when determining whether
of a Roth IRA may make it worthwhile to have at least you are subject to income tax on Social Security benefits.
part of your retirement assets in Roth IRA form.
If anything, a conversion is more attractive now since
Start with no required minimum distributions. With a you have an opportunity to convert and pay income tax
Roth you aren’t forced to draw down your funds once with marginal rates that are generally lower than under
you attain age 70½ and can continue to benefit from the prior law. Since individual tax law changes are tem porary
and tax rates will revert to the former higher amounts
starting in 2026, you have an eight-year window to benefit
from lower rates.
Make “backdoor” Roth IRA contributions
The tax law prescribes income limits so high-income
individuals may not make a direct contribution to a Roth
IRA. However, there are no income limits on converting
traditional IRA funds to a Roth IRA.
Any person under age 70.5 who has earned income
by year-end can make an IRA contribution. While
income limits may prevent you from making a pre-tax
contribution, you can make this contribution even if you
have fully funded a 401(k) or another employer plan.
Once you have made your contribution to a traditional
IRA, simply convert that amount to your Roth IRA.
As long as this is your only traditional IRA and you
have made an after-tax contribution, then an immediate
conversion will have converted a tax-deferred asset into a
potentially tax-free asset. If you have multiple IRAs, the
IRAs are aggregated to determine how much is taxable
upon conversion.
While we spend much time on our investment strategies
to help gain an extra percentage or two of investment
yield, these tax planning strategies can be a more reliable
way of maximizing your after-tax retirement income and
wealth for your family - no matter how Social Security
and Medicare turn out.
Prudential Financial, its affiliates, and their financial
professionals do not render tax or legal advice. Please
consult with your tax and legal advisors regarding your
personal circumstances.
OCTOBER 2018
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