A primary factor for determining the relative benefits of traditional versus Roth retirement accounts for particular clients concerns the client’s current and projected future tax bracket, advisors say. While future tax rates are impossible to predict accurately, there are a few rules of thumb.
“One way to take advantage of timing is what we call the ‘tax valley,’” said Dustin Wolk at Crescent Grove Advisors in Milwaukee. “If a client defers Social Security until age 70, there will be years from retirement to age 70 when they will almost certainly be in a lower tax bracket. These are optimal years for taking distributions or performing Roth conversions.”
Traditional IRAs can be converted to Roths at any time, he said, but taxes will be due on the conversion—that is, on the principal and any earnings or appreciation that hadn’t been taxed previously. That’s why it’s better to wait for a low-income, low-tax year. Tax brackets are likely to bounce up again, he said, when clients begin taking Social Security, and go up even further when RMDs from their traditional IRAs and 401(k)s start (currently age 73).
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