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

Traditional IRA Vs. Roth IRA

The Benefits of a Roth IRA Conversion

How a Roth Conversion Works:

What is Your Next Step?

About The Retirement Group

Sources

Traditional IRA Vs. Roth IRA

If you have qualified funds in your University of Chicago 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 Chicago 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Traditional IRAs are usually funded with before-tax dollars and are generally fully taxable when withdrawn.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 Chicago 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 Chicago 401(k) plan, you can reach out to your University of Chicago HR Department.

How a Roth Conversion Works:

Jim and Linda are both 66 and retired from working at University of Chicago. 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 Chicago employees and retirees, we’ve found that everyone’s definition of a comfortable retirement from University of Chicago 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 Chicago 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 Chicago 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 Chicago 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 Chicago 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

What are the eligibility criteria for participation in the SEPP plan for employees of The University of Chicago, and how can factors like years of service and age impact an employee's benefits under this plan? Discuss how these criteria might have changed for new employees post-2016 and what implications this has for retirement planning.

Eligibility Criteria for SEPP: Employees at The University of Chicago become eligible to participate in the SEPP upon meeting age and service requirements: being at least 21 years old and completing one year of service. For employees hired after the plan freeze on October 31, 2016, these criteria have been crucial in determining eligibility for newer employees, impacting their retirement planning as they do not accrue benefits under SEPP beyond this freeze date.

In what ways does the SEPP (Staff Employees Pension Plan) benefit calculation at The University of Chicago reflect an employee's years of service and final average pay? Examine the formulas involved in the benefits determination process, including how outside factors such as Social Security compensation can affect the total pension benefits an employee receives at retirement.

Benefit Calculation Reflecting Service and Pay: The SEPP benefits are calculated based on the final average pay and years of participation, factoring in Social Security covered compensation. Changes post-2016 have frozen benefits accrual, meaning that current employees’ benefits are calculated only up to this freeze date, affecting long-term benefits despite continued employment.

How can employees at The University of Chicago expect their SEPP benefits to be paid out upon their retirement, especially in terms of the options between lump sum distributions and annuities? Analyze the advantages and disadvantages of each payment option, and how these choices can impact an employee's financial situation in retirement.

Payout Options (Lump Sum vs. Annuities): Upon retirement, employees can opt for a lump sum payment or annuities. Each option presents financial implications; lump sums provide immediate access to funds but annuities offer sustained income. This choice is significant for financial stability in retirement, particularly under the constraints post the 2016 plan changes.

Can you elaborate on the spousal rights associated with the pension benefits under the SEPP plan at The University of Chicago? Discuss how marital status influences annuity payments and the required spousal consent when considering changes to beneficiary designations.

Spousal Rights in SEPP Benefits: Spouses have rights to pension benefits, requiring spousal consent for altering beneficiary arrangements under the SEPP. Changes post-2016 do not impact these rights, but understanding these is vital for making informed decisions about pension benefits and beneficiary designations.

As an employee nearing retirement at The University of Chicago, what considerations should one keep in mind regarding taxes on pension benefits received from the SEPP? Explore the tax implications of different types of distributions and how they align with current IRS regulations for the 2024 tax year.

Tax Considerations for SEPP Benefits: SEPP distributions are taxable income. Employees must consider the tax implications of their chosen payout method—lump sum or annuities—and plan for potential tax liabilities. This understanding is crucial, especially with the plan’s benefit accrual freeze affecting the retirement timeline.

What resources are available for employees of The University of Chicago wishing to understand more about their retirement benefits under SEPP? Discuss the types of information that can be requested from the Benefits Office and highlight the contact methods for obtaining more detailed assistance.

Resources for Understanding SEPP Benefits: The University provides resources for employees to understand their SEPP benefits, including access to the Benefits Office for personalized queries. Utilizing these resources is essential for employees, especially newer ones post-2016, to fully understand their retirement benefits under the current plan structure.

How does The University of Chicago address benefits for employees upon their death, and what provisions exist for both spouses and non-spouse beneficiaries under the SEPP plan? Analyze the specific benefits and payment structures available to beneficiaries and the conditions under which these benefits are distributed.

Posthumous Benefits: The SEPP includes provisions for spouses and non-spouse beneficiaries, detailing the continuation or lump sum payments upon the death of the employee. Understanding these provisions is crucial for estate planning and ensuring financial security for beneficiaries.

What factors ensure an employee remains fully vested in their pension benefits with The University of Chicago, and how does the vesting schedule affect retirement planning strategies? Consider the implications of not fulfilling the vesting criteria and how this might influence decisions around employment tenure and retirement timing.

Vesting and Retirement Planning: Vesting in SEPP requires three years of service, with full benefits contingent on meeting this criterion. For employees navigating post-2016 changes, understanding vesting is crucial for retirement planning, particularly as no additional benefits accrue beyond the freeze date.

Discuss the impact of a Qualified Domestic Relations Order (QDRO) on the SEPP benefits for employees at The University of Chicago. How do divorce or separation proceedings influence pension benefits, and what steps should employees take to ensure compliance with a QDRO?

Impact of QDROs on SEPP Benefits: SEPP complies with Qualified Domestic Relations Orders, which can allocate pension benefits to alternate payees. Understanding how QDROs affect one’s benefits is crucial for financial planning, especially in the context of marital dissolution.

How can employees at The University of Chicago, who have questions about their benefits under the SEPP plan, effectively communicate with the Benefits Office for clarity and assistance? Specify the various communication methods available for employees and what kind of information or support they can expect to receive.

Communicating with the Benefits Office: Employees can reach out to the Benefits Office via email or phone for detailed assistance on their SEPP benefits. Effective communication with this office is vital for employees to clarify their benefits status, particularly in light of the post-2016 changes to the plan.