By Phil Bloyd, Founder and President of Revolutionary Financial Group

Deciding how to save for retirement can be daunting. While it’s one of the most important financial decisions you will make, there are many options to save, both through your employer and on your own.

Over 55 million taxpayers own an individual retirement account (IRA), which is easy to set up and offers different investment options than employer-sponsored retirement plans.

There are several types of IRA plans, but two of the most popular are the Roth IRA and traditional IRA. One clear difference between a Roth and a traditional IRA is when you pay taxes on your contributions. Roth plans are taxed on contributions while traditional plans are tax-deferred until money is withdrawn.

In 2020, the average traditional IRA balance was $211,000, four times the average balance of Roth IRAs. Yet, many people lack a proper strategy for managing these accounts and potentially minimizing their tax burden in retirement. Traditional IRAs are powerful tools, but unlocking their true potential is more than simply having one.

Why Should You Make a Strategic IRA Plan?

There are a pair of restrictions within IRA accounts that limit your ability to manage funds efficiently.

First, there are tax limitations. If you’re one of the 23% of taxpayers who own a traditional IRA, you will eventually have to pay income tax on your withdrawals. Depending on the current income tax rate, that could be costly.

The second is required minimum distributions (RMDs), which force you to make a minimum annual withdrawal based on the amount of money in the account. These only apply to pre-tax IRAs, not Roth IRAs, and are subject to income tax. The starting age for RMDs is 73 and will creep up to age 75 by 2033.

However, RMDs don’t stop after you pass away: The SECURE Act requires the funds in newly inherited IRAs to be fully disbursed within 10 years. This applies to both pre-tax and Roth accounts.

It’s important to think about strategy when managing IRAs. A plan is not something you should create and leave alone — it should be actively managed by a professional to adapt to the highs and lows of the market.

Timing Roth Conversions

One way to manage taxes on traditional IRAs in retirement is by converting them into Roth IRAs. While the total of each conversion is still subject to the current income tax rate and can affect your tax bracket, Roth conversions can be an efficient way to limit your tax burden.

The Tax Cuts and Jobs Act, enacted in 2017, was one of the biggest tax laws and policy overhauls in decades, resulting in tax cuts for millions of Americans. While President-elect Trump has promised to extend the TCJA, unless Congress takes action, it will sunset at the end of 2025, which could lead to tax increases for many Americans. Regardless of whether it is extended, most financial professionals expect taxes to increase in the future.

Some people are willing to pay taxes at the current low rates and wait until taxes increase to make Roth conversions. But waiting to make tax moves until after taxes increase is like fixing the leaks in your roof during a hurricane – it’s inefficient.

Creating a proactive, year-long strategy for efficiently managing your IRAs is important. This takes into account the ups and downs of the market and properly timing your conversions. Our investment advisors work with you to craft a flexible plan that considers the latest market developments.

For example, if you plan to convert $40,000 into a Roth IRA in 2025, a strategic plan would space out conversions throughout the entire year. This allows our advisors to adapt based on whether the market is high or low, and capitalize when the market is in a downturn. If the market rises while your money is in a Roth IRA, it will grow tax-free.

Bull-Bear IRA Split

Whether they want to or not, there comes a time when retirees must begin taking their RMDs from their traditional IRA plans. The total amount takes into account the size of the accounts and your life expectancy. It can be calculated using a form provided by the IRS.

The IRS calculates your RMDs based on each IRA balance but it doesn’t matter how many accounts you have or which accounts you withdraw from to meet the requirement. That’s why a bull-bear growth strategy can be effective in minimizing risk in your IRA accounts. You can open multiple IRAs and assign each one a different purpose. For example, if you have two IRAs, one account would be set up more aggressively, with investments geared towards growth. Conversely, the other account would be set up more conservatively with a lower risk profile.

The more aggressive account would be used when share prices rise more than 10% to capitalize on that growth. Because the IRS doesn’t stipulate which accounts you take your RMDs from as long as you satisfy the annual requirement, using them on this account in a bull market helps ensure you don’t own too much capital in one stock. Essentially, you cash in your gains to satisfy the RMD requirement and keep the account at a similar value.

In a bear market, when share prices fall more than 10%, rather than selling stocks while they are low to satisfy the RMD requirement, you can use your RMDs on the more conservative account. This strategy allows you to capitalize on growth opportunities without taking too much risk.

Having a solid retirement plan is the first step, but considering the strategy within that plan can help you manage the funds efficiently. In the case of IRAs, it can help you limit your potential tax burden. A financial professional can help craft the right strategy for your financial needs, navigating you through the ups and downs of the market to help lead you to a comfortable retirement.

Investment advisory products and services made available through AE Wealth Management, LLC (AEWM), a Registered Investment Adviser. Neither the firm nor its agents or representatives may give tax or legal advice. Individuals should consult with a qualified professional for guidance before making any purchasing decisions. P.T. Bloyd & Associates, Inc. dba Revolutionary Financial Group is not affiliated with the U.S. government or any governmental agency. Investing involves risk, including the potential loss of principal. 2810464 – 1/25