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Your Tax Questions, Answered: How Can I Get the Most Out of a Roth Conversion? Plus, When Should I Stop Buying Term Life?

By Motley Fool Staff - Feb 5, 2018 at 8:40PM

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One listener thinks this is a good year to do shift assets, because he’s temporarily in a lower tax bracket. The other is pondering how much longer his family needs the protection of life insurance.

At the Motley Fool Answers podcast, we can tell a lot about what's on our listeners' minds by looking into the mailbag, and no surprise, right now, the topic of interest is starting to be taxes. The W-2s are rolling in, people are beginning to anticipate their tax refunds, and they're also beginning to stress about the process involved in getting them. So, for this episode, hosts Alison Southwick and Robert Brokamp recruit a special guest to sort out some of those concerns: Megan Brinsfield, head of financial planning for Motley Fool Wealth Management, and also a CFP and CPA.

In this segment, they talk about the tax implications of moving stock from a traditional IRA to a Roth IRA, and whether it's better to move your "winners" or your "losers." Then, they try to decide how much longer a 60-year-old listener might reasonably want to keep shelling out for a term life insurance policy.

A full transcript follows the video.

This video was recorded on Jan. 30, 2018.

Alison Southwick: We're excited for them. The next question comes from Don. "I'm 46 and I'm in a very low tax bracket this year. I've already maxed out my 401(k) and my Roth, and I'm thinking of converting some stock from my traditional IRA to my Roth IRA. Should I move my winners or my losers to this Roth? I'm thinking that if a holding of mine takes a short-term hit, I should use that opportunity to convert some portion of that holding into my Roth IRA when it has temporarily decreased in value. I'm thinking this would result in a greater number of shares converted or a slightly lower tax bill when I convert. Am I onto a good idea or am I overthinking this?"

Megan Brinsfield: I think Don's overthinking this a little bit. Ultimately, you're going to pay tax on whatever amount you convert. In very specific circumstances, you can transfer the stock itself. Usually, though, you have to liquidate from your traditional IRA and then transfer cash to your Roth and purchase a stock in there. I think the mechanics could work in a very specific scenario, but most of the time you're transferring cash, anyway, so just decide on an amount that you want to convert and convert that amount. I don't think there's a ton to optimize around which specific stocks you choose.

Brinsfield: What do you think, Bro?

Robert Brokamp: I agree with your answer, completely, otherwise he's clearly on the right track. Congratulate him, because he's already maxed out his Roth and his 401(k), and he's thinking along the right lines in that when you're in a year when you're not going to pay high taxes, that's a great year to be doing a Roth conversion.

Brinsfield: Exactly.

Southwick: The next question comes from Chad. "When should I terminate my term life insurance policy? I'm 60 and have no significant medical issues. I'm married and have three daughters. The oldest is on her own, the middle daughter is 70% through college, and the youngest will enter college next fall. I've no debt on my home and a vacation home, and I have $2.1 million saved for retirement. My total annual expenses are $68,000. I've worked in the petroleum industry for 38 years; however, I am not working right now because of a downturn in the industry. I plan to work for perhaps five more years when I find a job. I've been buying a $500,000 term life insurance policy for $1,800 a year premium. I'm considering terminating this policy. Please provide your thoughts and guidance on when a person should no longer buy life insurance."

Brokamp: The first question you ask yourself when it comes to insurance is what would happen if I die? Would the people who rely on me financially be OK? And looking at his situation, the answer is probably. I mean, he's got more than $2 million saved for retirement. Both his house and his vacation home are paid for.

One rule of thumb that I often talk about is you should have insurance up until your kids graduate from college. That's one big expense coming down the road for Chad where he might want to, because he may not know how much he's going to have to shell out for that. He didn't mention anything about having saved for that. He might want to wait until all his kids are out of college and then terminate the policy because at that point he's probably on pretty solid financial ground.

Southwick: If one of his daughters blows through $2.1 million in college, that would be amazing.

Brokamp: That would be amazing. But as someone who has three teenagers and is looking at the $70,000 per year price tag on some of these schools, it can require quite a chunk of change.

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