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ROTH CONVERSION

Bracing for the Storm

2020 appears to be the year of the Roth Conversion. You have probably heard about it in the news. With increased government spending comes the anticipation of higher taxes. Anyone can convert retirement accounts to a Roth IRA. We feel it is a perfect storm for careful consideration.

A Roth Conversion is a qualified transfer of all, or part, of your Traditional IRA to a Roth IRA. The conversion amount is treated as taxable income during the year the conversion takes place. When your account is down, you can convert with a lower tax bill and enjoy tax-free earnings forever as long as you take a qualified distribution. Qualified distributions are accessing the money after reaching age 59½ and a five year holding period. There are several exceptions to the age requirement such as first time home buyers, medical expenses, death, and disability.

Why Roth Conversions may make sense to you:

  • Current high standard deductions
  • Federal Tax Rates are at historical Lows
  • Increased government spending through stimulus. . . expect higher taxes in the future
  • Roth conversions reduce the taxable IRA balance – reducing future required minimum distributions (RMD)
  • Roth conversions pass on tax-free to your heirs while Traditional IRAs require your beneficiaries to recognize the balance and growth as income over 10 years.  This often occurs at the height of their own earnings.

If you do not have a Traditional IRA to convert and your income prevents you from making ROTH IRA contributions you can participate by contributing to an IRA with nondeductible contributions. Make sure to file the IRS Form 8606 proving the after-tax nature of the nondeductible contribution. Once you make your nondeductible contribution, you can immediately convert your Traditional IRA to a Roth IRA with little or no tax consequence.