Steering your ship through the taxing waters of retirement planning means that you might find yourself considering the benefits and drawbacks of many different investment vehicles. At the heart of this debate is the pre-tax Individual Retirement Account (IRA). Experts caution against falling for the short-term tax savings allure—this is not the best option for you. Beyond planning for future healthcare needs, people should plan their estates overall.
Ed Slott, a popular financial educator and CPA, calls the traditional IRA an “IOU to the IRS.” He is quick to point out that these accounts have future tax liabilities. This lens becomes all the more important when laid over increasing costs of long-term care. The Department of Health and Human Services estimates that 56% of Americans who reached age 65 in 2022 will require long-term care services. This shocking statistic tells us that many retirees are putting a significant financial burden on their families.
The soaring costs of long-term care, reported in Genworth’s yearly cost of care survey only add to the malaise. Given these increased expenses, strategies to maximize retirement assets are especially essential. Jeff Levine has a better idea—let’s expand the medical expense deduction to start offsetting exorbitant healthcare costs. This deduction lets people deduct medical costs that are over 7.5% of their AGI for the year. With no extension in sight for 2024, this tax break is still available for 2025, making this a continuing opportunity for relief.
In this landscape, Roth conversions become a key strategic consideration. By moving pre-tax IRA funds into a Roth IRA, individuals can initiate tax-free growth, albeit after paying an upfront tax bill. This method enables tax-smart, strategic withdrawals of pre-tax funds from retirement accounts. Ed Slott is deeply committed to Roth conversions as the ideal strategy for tax planning. He wants people to understand the long-term power of enjoying tax-free withdrawals in retirement.
In response, Jeff Levine provides the opposite perspective here, making the case for keeping at least a little “dry powder” in pre-tax retirement accounts. This multi-year strategy increases flexibility in withdrawing funds and can maximize tax benefits depending on each person’s unique circumstances and financial needs.
The issue even bleeds into estate planning concerns. Pre-tax IRAs may be less attractive for heirs. That’s thanks to the dreaded “10-year rule,” which mandates that they deplete inherited accounts within 10 years of the original account owner’s passing. This far more aggressive withdrawal schedule can lead to material tax consequences for inheritors. Retirement IRAs make great pre-tax charitable donations. The downside to this move is that it clears out the funds completely, which robs your heirs of maximum inherited benefits they could receive.
Ed Slott knows what’s wrong with pre-tax IRAs. Yet, he acknowledges their benefits in alleviating traffic congestion in some scenarios. In much the same way, Jeff Levine reiterates that preserving at least a bit of pre-tax wealth within retirement accounts creates planning possibilities.
