Day: October 14, 2024

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Taxes are a valid concern if you want to roll over $720,000 from your retirement fund into a Roth IRA. While you won’t pay any taxes if the assets you’re rolling over are held in another Roth account, there’s typically no way to completely avoid paying taxes when rolling pre-tax money into a Roth IRA. However, with a few strategic moves, you can potentially limit today’s tax pain while still reaping the rewards of tomorrow’s tax-free benefits. To determine if a Roth rollover aligns with your overall savings and tax strategy, consider running the numbers with a financial advisor who’s attuned to your financial situation and retirement vision.

Roth Rollover Rules

A Roth IRA is a retirement account that allows people to contribute after-tax dollars. Unlike a traditional IRA, you don’t get a tax break on Roth contributions. However, qualified Roth withdrawals in retirement can be made tax-free. This differs from traditional IRAs, whose contributions are often tax-deductible but withdrawals are taxed as ordinary income.

In general, you can roll over funds from another retirement account such as a traditional IRA or 401(k) into a Roth IRA. This is called a Roth conversion or Roth rollover. When you convert funds, you owe income taxes on the amount that’s rolled over for that year. So if you roll over $50,000 from a traditional IRA to a Roth IRA, the $50,000 is added to your taxable income for the year.

It’s important to understand that Roth rollovers are not the same as Roth contributions. Higher-income taxpayers may not qualify to make direct Roth contributions. However, there are no income limits on doing Roth conversions from other accounts.

You can roll over funds from 401(k)s, 403(b)s, 457 plans, traditional IRAs, SEP IRAs and Simple IRAs. To start the process, contact the institution that holds the account you want to roll over and convert. They can help facilitate the transfer. You typically have 60 days to complete the conversion, otherwise, the IRS will treat the transfer as a distribution and you could be hit with a 10% early withdrawal penalty. But if you need additional help determining how much to roll over and convert, consider speaking with a financial advisor.

Why Roth Rollovers Matter

There are a few key reasons why an individual might choose to do a Roth conversion:

• Tax-free growth: Money that’s converted into a Roth IRA grows tax-free. This differs from traditional IRAs whose investment earnings are tax-deferred but eventually get taxed when they’re withdrawn. Roth withdrawals will be 100% tax-free, provided you satisfy the five-year rule and are 59.5 years old.

• Avoid RMDs: Traditional IRAs are subject to required minimum distributions (RMDs) – mandatory withdrawals that start at age 73. For those who don’t need these distributions, RMDs can create excess taxable income. However, Roth conversions eliminate future RMDs since Roth accounts are not subject to these rules.

• Tax savings: Paying conversion taxes now can make sense if you expect to be in a higher tax bracket in retirement. Roth conversions lock in today’s rates. They also reduce future RMD amounts that could push you into a higher bracket.

• Inheritance planning: Heirs who inherit Roth IRAs can potentially stretch out tax-free distributions over their life expectancy, depending on their relation to the person who died. However, some beneficiaries will be required to empty the account within 10 years.

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As you can see, there are some good reasons to convert an IRA or 401(k) into a Roth IRA, but a financial advisor can help you explore how such a transaction may impact your finances and tax liability.

Roth Rollover Strategies

When doing a Roth conversion, the main drawback is the tax obligation. There are some strategic moves to potentially reduce taxes, though:

• Partial conversions: One method is to do partial Roth conversions over multiple years instead of converting your entire balance at once. The idea is to convert just enough each year to “fill up” your current bracket with income while also avoiding a higher bracket.

• Low-tax years: In low-income years it may make sense to convert larger sums. This could be early in retirement before RMDs or Social Security begins. Again, the goal is to add just enough extra income to fill up your current tax bracket without pushing you into the next tax bracket.

• Use non-retirement assets: Many experts suggest paying conversion taxes with non-retirement funds instead of IRA assets. This allows your entire IRA balance to transfer to the Roth account and keep growing tax-free.

If you need help determining which strategy is best for you, consider using this free matching tool to connect with a fiduciary financial advisor.

Rollover Strategies in Action

As an example, let’s consider a single filing taxpayer who wants to roll over $720,000 from an old 401(k) to a Roth IRA. Here are a few scenarios to think about:

Lump Sum Conversion

Converting the entire $720,000 would potentially generate a tax bill of nearly $220,000 at today’s top marginal rate of 37% (assuming you take the standard deduction of $14,600). That whole sum has to be paid for the year in which the conversion is completed.

Partial Conversions Spread Over 10 Years

Completing a series of conversions each year for 10 years controls tax bracket jumps and spreads the tax hit over a decade. A $72,000 annual conversion would put you in the 22% bracket if you have little or no additional income. That translates to a tax bill of approximately $7,700 per year or $77,000 over 10 years – less than half of what you’d pay on a lump sum conversion. Keep in mind that your balance will potentially continue to grow during these 10 years, requiring additional conversions and more taxes to pay.

Low-Income Year

By maximizing conversions during years in which your income dips, you can take advantage of being in a lower tax bracket. For example, say you earn $60,000 in taxable income in a typical year, placing you in the 22% bracket and resulting in a tax liability of approximately $5,200 after taking the standard deduction. If you also convert $72,000, you’ll move up into the 24% bracket with $132,000 in total taxable income. You’d see your tax liability climb to around $21,000. Do this two years in a row and your combined tax bill will be approximately $42,000.

But say you will only receive $30,000 one year because you are taking a six-month sabbatical. You could skip conversions in the previous year and convert two years’ worth, or $144,000, in the sabbatical year. That year, you’ll have an income of $174,000, including $144,000 in conversions and $30,000 from salary. This would put you in the 24% bracket and generate a tax bill of approximately $31,000. Add the $5,200 tax bill from the previous year and your two-year tax bill could end up being around $36,200. A financial advisor can help you assess whether this strategy may be an option for you.

Non-Retirement Assets

Using non-IRA funds to pay your tax bill on a conversion allows the full amount of the rollover to go into the Roth account. If you use taxable funds rather than IRA funds to pay all taxes due on a lump sum conversion of $720,000, that’s $227,000 more you’ll have growing tax-free in your Roth.

Bottom Line

Roth rollovers can reduce future taxes and eliminate RMDs in retirement, at the cost of having to pay more in taxes today. Strategic partial conversions completed over several years, conversions timed with low-income years can potentially limit the tax pain, as well as using non-retirement assets to pay conversion taxes. Consult with financial and tax professionals to map out a tax-savvy approach.

Retirement Planning Tips

• With a major retirement move like a Roth conversion, it helps to sit down with a financial advisor who can analyze your full financial picture. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

• It’s important to have a sense of the progress you’re making as you plan and save for retirement. SmartAsset’s free retirement calculator can help you estimate how much money you may need to save to retire and whether you’re on track to hit that target.

• Keep an emergency fund on hand in case you run into unexpected expenses. An emergency fund should be liquid — in an account that isn’t at risk of significant fluctuation like the stock market. The tradeoff is that the value of liquid cash can be eroded by inflation. But a high-interest account allows you to earn compound interest. Compare savings accounts from these banks.

• Are you a financial advisor looking to grow your business? SmartAsset AMP helps advisors connect with leads and offers marketing automation solutions so you can spend more time making conversions. Learn more about SmartAsset AMP.

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The post I Want to Roll Over $720k to a Roth IRA. How Do I Avoid Paying Taxes? appeared first on SmartReads by SmartAsset.

For almost 60 years, Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B) CEO Warren Buffett has been delivering outsize returns. Based on the closing price of Berkshire’s Class A shares (BRK.A) on Oct. 10, he’s overseen a nearly 5,500,000% aggregate return and watched his company (briefly) hit the trillion-dollar mark, which is something only eight publicly traded companies have accomplished.

The Oracle of Omaha’s secrets to success really aren’t secrets at all. Whether it’s through his annual letter to shareholders, shareholder meetings, or rare interviews with financial media, Buffett willingly discusses the traits he looks for when putting his company’s capital to work.

But among the various characteristics that have powered Berkshire’s phenomenal returns is his penchant for investing in dividend stocks. Companies that pay a dividend are almost always profitable on a recurring basis, time-tested, and capable of providing transparent growth outlooks.

More importantly, dividend stocks have absolutely crushed non-payers in the return column over the last half-century. According to The Power of Dividends: Past, Present, and Future, which was released last year by the investment advisors at Hartford Funds, dividend stocks have averaged a 9.17% annualized return over the previous 50 years (1973-2023), while non-payers have produced a more modest 4.27% average annual return over the same timeline.

Over the next 12 months, Warren Buffett is set to oversee the collection of roughly $5 billion in dividend income for Berkshire Hathaway.

However, three of Buffett’s core holdings are generating truly outsize yields that range from 33% to 60% on an annual basis. His secret to netting these supercharged yields is really simple: patience.

Coca-Cola: 60% annual yield to cost

Out of the 43 stocks and two index funds held in Berkshire Hathaway’s $313 billion portfolio, none has been a fixture longer than beverage behemoth Coca-Cola (NYSE: KO).

Buffett’s company has been a shareholder of Coca-Cola since 1988, with Berkshire boasting an enviable cost basis in the company of $3.2475 per share. Given that Coca-Cola has raised its dividend for 62 consecutive years and is currently doling out $1.94 annually, Berkshire is netting a whopping 60% annual yield on this position, relative to its cost basis. Berkshire’s brightest investment minds simply sitting on their hands will lead to $776 million in annual income over the next 12 months.

One of the clearest reasons Coke has been such a steady outperformer for decades is because it’s a consumer staples stock. This is to say that it sells products (beverages) that are in demand regardless of how well or poorly the U.S. and global economy are performing. Selling basic need goods ensures cash flow consistency year after year.

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The company also has virtually unrivaled geographic diversity in its corner. Sans North Korea, Cuba, and Russia, it has operations in every other country. This means it generates highly predictable operating cash flow in developed markets, but is also moving the organic growth needle in emerging markets.

Further, Coca-Cola was named the most-chosen brand by Kantar’s “Brand Footprint” report for the 12th consecutive year in 2024. Well-known, time-tested, consumer staples stocks tend to outperform over long periods, and Coca-Cola is no exception.

American Express: 33% annual yield to cost

A second longtime holding in Berkshire Hathaway’s portfolio that’s responsible for an outsize yield is credit-services provider American Express (NYSE: AXP), which is better known as “AmEx.”

AmEx has been a continuous holding for Buffett’s company since 1991, with Berkshire sporting a cost basis in the company of about $8.49 per share. Although AmEx doesn’t increase its dividend on an annual basis like Coca-Cola, it has boosted its payout notably over time. The $2.80 per share that’s being paid out annually ($0.70 per quarter) equates to a 33% yield relative to cost for Buffett’s company.

Warren Buffett is a huge fan of financial stocks because they’re cyclical. Even though recessions are a normal part of the economic cycle, they resolve quickly. Financial stocks like AmEx are usually able to take advantage of economic expansions lasting disproportionately longer than downturns.

What’s arguably even more important for American Express is being able to take advantage of both sides of a transaction. It serves as the third-largest payment processor in the U.S. by credit card network purchase volume, which allows it to collect fees from merchants. Additionally, it generates annual fees and interest income by acting as a lender via its credit cards.

Lastly, AmEx has historically done a phenomenal job of attracting high-earning cardholders. The well-to-do are less likely to alter their spending habits, regardless of what the U.S. or global economy throw their way.

Moody’s: 34% annual yield to cost

The third high-octane stock that Warren Buffett is generating a jaw-dropping yield to cost on is ratings agency Moody’s (NYSE: MCO).

Patience is the theme of this list. Moody’s has been a pillar in Berkshire’s portfolio since being spun off from Dun & Bradstreet in 2000. Over that time, Moody’s base annual payout has grown to $3.40 per share. With Berkshire’s cost basis in Moody’s a minuscule $10.05 per share, it means Buffett’s company is netting a cool 34% yield, relative to cost.

For more than a decade, Moody’s Investors Services benefited immensely from historically low interest rates. Businesses and governments were eager to raise capital at attractive rates, which kept Moody’s ratings agency busy.

But with interest rates climbing at a rapid clip since March 2022, it’s the company’s Analytics segment that’s now driving its growth. This is the segment responsible for assessing risk management and offering compliance solutions to its customers. With a couple of predictive indicators suggesting trouble is on the horizon, such as the first meaningful decline in M2 money supply since the Great Depression and the longest yield-curve inversion in history, risk management solutions should remain a hot commodity.

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American Express is an advertising partner of The Ascent, a Motley Fool company. Sean Williams has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway and Moody’s. The Motley Fool has a disclosure policy.

Warren Buffett Is Generating an Annual Yield of 33% to 60% From 3 Magnificent Stocks — Here’s His Simple Secret to Outsize Yields was originally published by The Motley Fool

Former President Donald Trump’s proposed tax plan has stirred up fresh controversy. A new analysis shows that it could provide substantial tax cuts for the nation’s wealthiest while burdening the rest with tax increases by 2026.

According to a recent Institute on Taxation and Economic Policy (ITEP) report, the top 1% of earners could enjoy an average tax cut of over $36,300. In comparison, the next 4% would see cuts averaging $7,200. Meanwhile, 95% of Americans could face tax hikes ranging from $600 to $1,800, depending on their income bracket.

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Trump, who often touts his tax plan as a boon for everyday Americans, would instead disproportionately benefit the wealthiest, the ITEP analysis suggests. Steve Wamhoff, ITEP’s federal policy director and lead researcher, put it bluntly in an interview with Salon: “It does seem like there’s a whole bunch of complicated proposals here to just make the rich a little bit richer and then make everyone else worse off.”

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The middle 20% of American households, earning between $55,100 and $94,100, would be hit with an average tax increase of $1,530 – about 2.1% of their income, per the ITEP findings. The poorest 20% of households, those earning under $28,600, would face an average tax hike of $800, accounting for 4.8% of their income. Essentially, as family income decreases, the burden of these tax hikes increases.

Other experts, like Erica York, senior economist at the Tax Foundation, have offered a more nuanced take. She noted that Trump’s proposals often combine regressive taxes, like tariffs, with more progressively distributed income tax cuts.

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“How each income group fares will depend on which combinations of tax and tariff ideas Trump ultimately pursues,” York told Salon in an email. She added that higher tariffs could “outweigh the benefits of the reduced taxes for lower and middle-income groups.”

Key to Trump’s tax strategy is his plan to extend most of the provisions from his 2017 tax law, which expires at the end of 2025. His new proposals include reducing the corporate tax rate from 21% to 20% or even 15% for certain U.S.-made products and eliminating overtime pay and tips taxes. Additionally, Trump has suggested a sweeping 20% tariff on all imported goods and a steeper 60% tariff on goods from China.

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Proponents argue that Trump’s plan would boost U.S. jobs and support working-class families. “President Donald Trump passed the largest tax CUTS for working families in history,” his campaign said in a statement to Salon. However, critics warn that the tariffs would function as a federal consumption tax, disproportionately affecting low-income and middle-class families.

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This article Expert Finds Trump’s Tax Proposal Drains Money From 95% Of Households And Funnels It To The Top 5%, Widening Wealth Gap originally appeared on Benzinga.com

© 2024 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.

Vice President Kamala Harris has a slight edge in becoming the next president, according to Decision Desk HQ’s model. The Democratic Party could have a tougher time gaining control of Congress, though. Decision Desk HQ estimates that the GOP has a 54% probability of holding onto its majority in the House and a 71% chance of recapturing a majority in the Senate.

Still, it’s possible that momentum could swing toward the Democrats in the final weeks of the campaign. How might investors take advantage of such a scenario? Here are three no-brainer stocks to buy if Harris and Democrats sweep in November.

1. D.R. Horton

D.R. Horton (NYSE: DHI) would likely be among the biggest winners if Harris wins and Democrats control Congress in the upcoming elections. The company has been the largest U.S. homebuilder by volume since 2002. It operates in 121 markets across 33 states.

Harris has proposed a plan that she says will promote the construction of 3 million new homes over the next four years. She wants to give $25,000 to first-time homebuyers to help them with down payments. The Democratic presidential nominee also seeks to provide a tax incentive for homebuilders who sell homes to first-time homebuyers. Both proposals would almost certainly boost D.R. Horton’s revenue.

Another key reason many D.R. Horton shareholders might cheer a Democratic sweep is inflation. A survey of nearly 40 top U.S. economists by the Financial Times and the University of Chicago found that 70% believed Harris’ policies would lead to lower inflation than those proposed by former President Donald Trump. Lower inflation translates to lower interest rates — an important ingredient to D.R. Horton’s success.

Regardless of which party is in control after the elections, though, D.R. Horton should be in great shape over the long run. The U.S. continues to face a housing shortage. And there’s only one practical solution to the problem: Building more homes.

2. Brookfield Renewable

Democrats have been vocal supporters of renewable energy for years. Harris is no exception. She promises to “invest in building the energy industries of the future.” The Vice President also wants to cut red tape to allow clean energy projects to be completed quickly. Brookfield Renewable (NYSE: BEP) (NYSE: BEPC) could be a beneficiary of these policies.

Harris seeks to protect the energy security of the U.S. and keep the country from having to rely on foreign oil. While domestic production of oil and natural gas will be needed to achieve this goal, renewable power will be increasingly important.

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Brookfield Renewable is one of the largest producers of clean energy with hydroelectric, wind, and solar facilities across the world. The company currently has an operating capacity of around 37 gigawatts, twice as much as it had in 2020. Its development capacity is roughly 200 gigawatts.

Two other factors should help Brookfield Renewable even if Democrats don’t win across the board in November. First, renewable power is already the lowest-cost energy alternative. Second, the demand for electricity is growing rapidly, especially with the surging number of data centers.

3. UnitedHealth Group

Harris has committed to making permanent the tax credits available to working and middle-class families purchasing health insurance on the Affordable Care Act (ACA) marketplace if elected president. She wants to accelerate the speed of Medicare drug price negotiations.

Both proposals should help companies that offer health plans on the marketplace and Medicare Part D prescription drug plans. UnitedHealth Group (NYSE: UNH) is the biggest health insurer in the group.

UnitedHealth Group offers individual and family health plans on ACA health insurance marketplaces in 26 states. Last year, the company enrolled 10.2 million people in Medicare Part D plans, including stand-alone plans and Medicare Advantage plans.

There’s a bigger tailwind, though, that should be more important to UnitedHealth Group over the long term than which party is in power in Washington, D.C.: an aging population. The number of Medicare enrollees is projected to soar by 2030 as baby boomers retire. Look for Medicare Advantage to become an even more important part of UnitedHealth’s business in the coming years.

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Keith Speights has positions in Brookfield Renewable and Brookfield Renewable Partners. The Motley Fool has positions in and recommends Brookfield Renewable and D.R. Horton. The Motley Fool recommends Brookfield Renewable Partners and UnitedHealth Group. The Motley Fool has a disclosure policy.

3 No-Brainer Stocks to Buy If Kamala Harris and Democrats Sweep in November was originally published by The Motley Fool