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Feeling Tax Nimble?

Benjamin Franklin said that “nothing can be certain except death and taxes” - but even taxes have changed dramatically over time. 

Roth IRAs have the potential to grow and be distributed income tax free.  While some investors are prevented from making Roth contributions because of their income – everyone is eligible to convert to a Roth IRA.  A Roth conversion turns off the accumulation of taxes by transferring retirement funds from a traditional IRA or 401k into a Roth Account.  The conversion is a taxable transfer from a pre-tax retirement account at current income tax rates to a Roth IRA.  Roth Conversions allow for nimble tax planning given the uncertainties of the future.

This year has created a unique opportunity for ROTH CONVERSIONS:


Required Minimum Distributions (RMD) are Waived for 2020

A RMD is calculated for account owners currently 70.5 years or older, forcing them to recognize income from their IRA accounts each year.  This obligation is waived for account holders in 2020, creating an opportunity to convert the RMD amount to a Roth IRA typically taken without extra tax burden.

Generous Standard Deduction

Standard deductions increased in 2020 (See Chart).  For a married couple both over the age of 65, the standard deduction is $27,400.

Tax-Free Growth 

Because Roth IRAs grow tax free, the earlier you convert your assets the bigger the impact.  Even someone who is already retired can receive the benefit of a Roth conversion.  Consider a 65-year-old retiree who expects to live 20+ more years, if you spend the Roth conversion last in retirement, the conversion amount could possibly double twice before you spend it.  For example, a $50,000 conversion that grows at 7% could be worth $200,000 income tax free in 20 years.

Federal Tax Rates are at Historical Lows  

In 2013, just seven years ago, a married couple earning $75,000 would pay two times as much in taxes, compared to 12% today.  Eventually the stimulus will need to be paid for – expect higher taxes in the future.

Consider a Surviving Spouse  

Taxable income limits for single filers are lower than for married filers.   A surviving spouse living on the same income will pay more in taxes.   Roth conversions reduce the taxable IRA balance and grows tax free to reduce taxes in the future, especially for the surviving spouse.

Converting Shares at a Reduced Price

Market Values are lower as stocks are “on sale.”  A conversion now gives you more bang for your buck as you recognize taxes on the lower priced shares.  The lower priced shares are added to your Roth IRA where the recovery allows you to not pay taxes on the gains.

Estate Planning

Non spouse beneficiaries of IRA accounts are now required to liquidate the balance within 10 years of the death of the owner.  This could cause a large tax burden on the person inheriting the account.  Roth accounts are inherited by beneficiaries both estate and income tax free.

For the tax nimble, paying taxes today on a Roth Conversion when share prices and taxes are lower, opportunistically locks in tax free growth before federal and state taxes go up.

Before taking action contact us to be sure this opportunity is a fit for you.