Should you make a Roth IRA Conversion for University of Missouri Employees

Traditional IRA Vs. Roth IRA

If you have qualified funds in your University of Missouri retirement portfolio and are concerned about future tax law changes, converting those eligible funds to a Roth IRA could be a good solution for any University of Missouri employee or retiree.

Traditional IRAs are usually funded with before-tax dollars and are generally fully taxable when withdrawn. The owner of a traditional IRA generally has required minimum distributions (RMDs) beginning at age 72. If withdrawals are taken before age 59 1/2, they may be subject to an additional 10% federal tax.

Roth IRAs are funded with after-tax dollars. Distributions after age 59 ½ are completely income-tax-free as long as the Roth IRA owner has met a five-year requirement, determined by the date the owner first funded any Roth IRA. No required minimum distributions apply during the owner’s lifetime, but certain RMD rules do apply to Roth IRA beneficiaries.

The Benefits of a Roth IRA Conversion

A Roth IRA conversion entails taking all or a portion of funds from a traditional retirement account and converting them to a Roth IRA. This could also apply to pre-tax funds in a qualified plan like your University of Missouri 401(k). Since you are moving pre-tax dollars to a post-tax account, you owe income taxes on the amount converted in the year of conversion. This can be paid with funds outside of your IRA or qualified plan. Any such conversion should be done with due diligence and consult with a financial planner to avoid major tax implications.

A few of the advantages of this strategy include:

Tax-free growth inside of Roth IRAs.
Qualified distributions from Roth IRAs are income-tax free, providing flexibility to choose when to take these distributions for smarter tax management.
There are no RMDs for Roth IRA owners when you reach age 72, but certain rules apply to Roth IRA beneficiaries.
There is a potential for lower taxes if the income tax bracket is projected to be the same or higher at the time of distribution than at the time of conversion.
A Roth IRA conversion could lower your income-tax bracket
Can reduce your estate taxes and eliminate the income tax your heir would have to pay

Some other items for consideration:

Roth IRA conversions are subject to ordinary income tax on the entire amount of the conversion in the year of conversion.
Distributions may be subject to the additional 10% federal tax if removed within five years of the conversion.

If you have any questions about your University of Missouri 401(k) plan, you can reach out to your University of Missouri HR Department.

How a Roth Conversion Works:

Jim and Linda are both 66 and retired from working at University of Missouri. They have a pension and Social Security benefits that amount to a taxable income of $65,000 a year. In 2022, they are in the 12% tax bracket ($20,551-$83,550) and are concerned that future tax law changes could put them in a higher bracket. [6]

Jim and Linda also have a traditional IRA with an account value of $750,000. In a few years, they will be required to start taking Required Minimum Distributions from this account that could bump them up to the next tax bracket.

While a Roth conversion is a fairly simple concept, there are many things to consider and several ways to do it. After discussing all of the variables with their financial professional, Jim and Linda decide to use a method often called “tax-bracket stuffing.”

With a taxable income of $65,000, there is $18,550 until they hit the top of the bracket - $83,550. If Jim and Linda convert $40,000 from the traditional IRA to a Roth IRA, they are bumped in to the 22% bracket, but once the standard deduction of $25,100 is applied, their taxable income will be $79,900.

By converting some of the funds from their traditional IRA to a Roth IRA, they can choose the amount of the distribution, so it stays within their lower tax bracket of 12% once the standard deduction is applied. And since qualified distributions from Roth IRAs are income tax free, Jim and Linda have the flexibility to choose when to take these distributions for smarter tax management.

If this method is used each year until Jim and Linda turn 72, they will continue to reduce the amount in their traditional IRA and increase the amount in their Roth IRA.

Want to learn if a solution like this is right for you? Call us today to discuss your financial goals.

What is Your Next Step?

Your receipt of this report entitles you to a one on one conversation with one of our TRG financial advisors to explore the benefits of diversifying your assets with your taxes in mind. Any customary hourly planning fees associated will be waived for this one hour session.

What should you expect at this meeting? Below are some frequently asked questions about what you can expect from our one on one meetings

Q: What will be discussed in this meeting?

A: This meeting is simply an opportunity for you to ask any questions that you may have related to the diversification of your assets with taxes in mind, as well as your personal finance and retirement. Throughout the course of the meeting, we will ask questions about you and your situation.

From working with many University of Missouri employees and retirees, we’ve found that everyone’s definition of a comfortable retirement from University of Missouri is a little different and that everyone’s situation is unique. Our goal is to learn about your personal goals as we explore how to help you retire from University of Missouri the way you want.

Q: Why is the consultation free?

A: Simple. It gives us an opportunity to meet people from around the area that may have questions about financial matters. It’s no secret that we love new clients. Gaining new clients is the way that our business grows. However, we want to provide a comfortable environment for exploring a new, potential professional relationship — for you and for us. By offering this time, it provides a non-threatening way for us to spend some time with you to see if it makes sense for us to continue discussions regarding your University of Missouri retirement in the future.

Q: Will there be a presentation?

A: Not at all. In fact, we are very hesitant to talk about any potential solutions to any questions or concerns you may have. It is important for us to understand your goals and desires about what retiring from University of Missouri or investing for your future means to you. We feel it would be financial malpractice to begin exploring solutions prematurely.

We tend to look at the first meeting as an opportunity for you to ask some questions and for us to get to know each other. Furthermore, we can both be more informed by the end of the meeting which will help determine whether or not it will be beneficial for us to meet again.

Q: How long is the meeting?

A: Most of our meetings are stacked throughout the day. Future sessions may require more time, but we’ve found that an hour, provides a good basis for getting to know a little more about each other.

Q: Is there anything I should bring to the meeting?

A: We are sensitive to the fact that your personal financial information is just that — very personal. However, it is hard for us to help if we don’t have at least a fundamental understanding of your financial position. We ask that you bring information regarding your financial accounts and your previous year’s tax return. However, we follow a strict policy of not looking at any of this until you are comfortable with us doing so.

Q: When would we meet again?

A: If we both decide that it would be beneficial to meet again, we’ll schedule another time to get together. At that meeting, we would introduce to you the various areas in which our firm may be able to provide value to your situation. Again, we shy away from offering solutions at this point because we still consider it to be a discovery meeting. At that point, you should be in a better position to make an educated decision as to whether you wish to engage the services of our firm.

Q: Should someone come with me?

A: We do ask that if you are married you bring your spouse with you. If you wish to bring any children with you to the meeting, you are welcome to do so. For that matter, anyone that you may utilize in helping you with your University of Missouri retirement and personal finances is welcome to join.

About The Retirement Group

The Retirement Group is a nation-wide group of financial advisors who work together as a team.

We focus entirely on retirement planning and the design of retirement portfolios for transitioning corporate employees. Each representative of the group has been hand selected by The Retirement Group in select cities of the United States. Each advisor was selected based on their pension expertise, experience in financial planning, and portfolio construction knowledge.

TRG takes a teamwork approach in providing the best possible solutions for our clients’ concerns. The Team has a conservative investment philosophy and diversifies client portfolios with laddered bonds, CDs, mutual funds, ETFs, Annuities, Stocks and other investments to help achieve their goals. The team addresses Retirement, Pension, Tax, Asset Allocation, Estate, and Elder Care issues. This document utilizes various research tools and techniques. A variety of assumptions and judgmental elements are inevitably inherent in any attempt to estimate future results and, consequently, such results should be viewed as tentative estimations. Changes in the law, investment climate, interest rates, and personal circumstances will have profound effects on both the accuracy of our estimations and the suitability of our recommendations. The need for ongoing sensitivity to change and for constant re-examination and alteration of the plan is thus apparent.

Therefore, we encourage you to have your plan updated a few months before your potential retirement date as well as an annual review. It should be emphasized that neither The Retirement Group, LLC nor any of its employees can engage in the practice of law or accounting and that nothing in this document should be taken as an effort to do so. We look forward to working with tax and/or legal professionals you may select to discuss the relevant ramifications of our recommendations.

Throughout your retirement years we will continue to update you on issues affecting your retirement through our complimentary and proprietary newsletters, workshops and regular updates. You may always reach us at (800) 900-5867.

Sources

How does the eligibility criteria for the Defined Benefit Retirement Plan at the University of Missouri System differ for Level One and Level Two members, particularly in regard to their hire or rehire dates?

Eligibility Criteria for Level One and Level Two Members: Level One members are employees hired before October 1, 2012, or those rehired before October 1, 2019, who had earned a vested benefit but did not receive a lump sum. Level Two members are those hired or rehired between October 1, 2012, and October 1, 2019, without eligibility for Level One benefits. Employees hired after October 1, 2019, do not accrue service credit under the DB Plan(University of Missouri …).

In what ways do service credits accumulated at the University of Missouri System impact an employee's retirement benefits, and how can employees ensure that they effectively maximize their service credit over the years?

Impact of Service Credits on Retirement Benefits: Service credits are critical in calculating retirement benefits at the University of Missouri System. Employees accumulate service credits based on their years of service, which directly affect their pension calculations. Maximizing service credits involves consistent full-time employment without breaks, as any leave of absence or part-time status may impact the total service credits earned(University of Missouri …)(University of Missouri …).

What are the various options available to employees at the University of Missouri System for receiving their retirement benefits upon reaching normal retirement age, and how do these options influence long-term financial planning for retirement?

Retirement Benefit Options: Upon reaching normal retirement age, employees can choose between a Single Life Annuity or a Joint and Survivor Annuity, both with options for lump-sum payments of 10%, 20%, or 30% of the actuarial present value. These choices influence monthly payout amounts, and selecting a lump sum reduces future monthly benefits proportionally(University of Missouri …).

With respect to the University of Missouri System's Defined Benefit Plan, how are employees' contributions structured, and what implications does this have for their overall retirement savings strategy?

Employee Contributions: Employees contribute 1% of their salary up to $50,000 and 2% for earnings beyond that threshold. This structure helps fund the DB Plan, with the University covering the majority of the cost. Employees need to factor in these contributions as part of their overall retirement savings strategy(University of Missouri …).

How can employees at the University of Missouri System assess their eligibility for early retirement benefits, and what considerations should be taken into account when planning for an early retirement?

Early Retirement Eligibility: Employees may retire early if they meet specific criteria: at least 10 years of service credit for ages 55–60 or at least 5 years of service credit for ages 60–65. Early retirees will receive a reduced benefit to account for the longer payout period(University of Missouri …).

What tax implications should employees of the University of Missouri System be aware of when it comes to distributions from their retirement plans, and how can they effectively navigate these implications?

Tax Implications of Retirement Plan Distributions: Distributions from the University of Missouri System’s DB Plan are subject to federal taxes. Employees can mitigate tax burdens by electing to roll over lump-sum distributions to a qualified retirement account, such as an IRA, to avoid immediate tax liability(University of Missouri …).

What are the policies regarding the continuation of benefits for employees who leave the University of Missouri System, particularly for those who are not vested or are classified as non-vested members?

Non-Vested Employee Policies: Employees who leave the University before vesting in the DB Plan (fewer than 5 years of service) are not eligible for retirement benefits but can receive a refund of their contributions. These non-vested employees must decide whether to receive their refunded contributions as a lump sum or through a rollover to another retirement account(University of Missouri …).

How might changes in employment status, such as taking a leave of absence or returning to work after a break, affect the service credit calculation for an employee at the University of Missouri System?

Impact of Employment Status Changes on Service Credit: Employees who take leaves of absence or return after breaks in employment may experience reductions in service credit. However, certain types of leave, such as military service or medical leave, may allow employees to continue earning service credit(University of Missouri …)(University of Missouri …).

In the event of an employee's death prior to retirement, what benefits are available to their survivors under the University of Missouri System's Defined Benefit Plan, and how can members ensure their wishes are respected?

Survivor Benefits: In the event of an employee’s death before retirement, survivors may be eligible for either a lump sum or monthly payments. Employees can designate beneficiaries to ensure that their wishes are honored, providing financial protection for dependents(University of Missouri …).

How can an employee at the University of Missouri System contact the Human Resources Service Center to obtain personalized assistance regarding their retirement options and any inquiries related to their retirement plan details? These questions require detailed answers and are designed to facilitate a comprehensive understanding of retirement processes and options for employees of the University of Missouri System.

Contacting HR for Assistance: Employees can contact the Human Resources Service Center for personalized assistance regarding their retirement options by emailing hrservicecenter@umsystem.edu or visiting the myHR portal for further details(University of Missouri …).