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April 17, 2020

5 Reasons This May Be The Right Time to Consider a Roth Conversion
David Hicks

The allure of tax-free money is undeniable.

And right now, it may just be one of the best times in history to consider creating more tax-free money for yourself, your family, and your future by way of the Roth Conversion.

Skeptical?  Here are five reasons why a Roth conversion looks more promising than ever before:

  1. The Market Is Low.  History tells us that after a crash, there will be a recovery (how fast it recovers is unknown).  If you convert to a Roth IRA while the market is low, and the market is in “recovery” mode, you may have just converted at a huge bargain.  Here’s an example: Your Traditional IRA was valued 15% greater at its peak.  Let’s assume you convert funds to a Roth IRA and the market rebounds to its pre-crash level, and now the funds you converted are worth 15% higher.  This growth from the rebound is now tax-free, and the taxes you paid on the conversion were essentially discounted.
  2. No Required Minimum Distributions (RMDs) For 2020.  The CARES Act has waived the RMD requirement for Traditional IRA’s and retirement plans for this year. By not taking your RMD this year, the option for a Roth Conversion may look a bit more attractive. Why?  By not taking an RMD, your taxable income has been reduced, paving the way for more opportunity to convert IRA funds in a more favorable tax manner.
  3. Put Your Stimulus Check To Work. For many of you, you just received your stimulus relief check.  If you don’t have a plan to use these funds, consider using this money to pay the taxes on a Roth Conversion. Just this past week, I converted $13,500 from a client’s Traditional IRA to a Roth IRA, using the stimulus relief check amount of $1,200 (which is tax-free) as the targeted tax amount for maximum conversion. Think about that – it’s a double whammy.  Tax-free money to pay tax for the amount converted AND tax-free recovery growth.
  4. Our Current (Low) Tax Rates Are Going Up.  Thanks to the Tax Cuts and Jobs Act of 2017 (TJCA), current tax rates have been pushed down to historic lows.  But, the TCJA is slated to expire on December 31, 2025, with the tax rates set to increase and revert to the 2017 levels.  Not to mention that the higher Standard Deduction we have now will drop back down. And with the recent $2.2 trillion in stimulus (and maybe more to come) added to the deficit, the case for higher taxes in the future just became more compelling. So if you think tax rates will increase in the future, then a Roth conversion could be a great idea.
  5. Spousal Planning.  If you’re married, you’re taking advantage of favorable joint tax rates.  What happens if one spouse dies?  Not only will the surviving spouse receive only one Social Security benefit (rather than two), but the year following the passing of the first spouse, the surviving spouse will be filing as a single taxpayer at higher tax rates.  By converting IRA funds to a Roth while both spouses are alive and well, it can allow you to take advantage of converting during a more favorable tax environment and reduce the impact of future tax strain for the surviving spouse in the future.

So Why Wouldn’t Everyone Convert From A Traditional IRA To A Roth IRA?

When you complete a Roth conversion, you’re increasing your taxable income for the year.  If you don’t understand where your current taxable income stands for the year, executing a Roth conversion without much thought and analysis could move you into a higher-than-desired tax bracket.

If you already have a Roth IRA that is more than five years old, and you’re over 59.5, the conversions into the Roth IRA are treated as if you have had them over five years, which eliminates the 5-year rule on the converted funds and allows you full access to the funds.  If you don’t have a Roth IRA or one that’s been held for over five years, withdrawing interest earned on the converted funds will have to wait five years (however, the principal can be withdrawn anytime).

Lastly, you are no longer able to “re-characterize” the conversion.  Meaning, there are no do-overs. Once the conversion is done, it’s done.  So be sure it’s the right move for you.

If you’re interested in learning more, we’re happy to walk through the details with you.  We’ll begin with establishing a 2020 baseline tax projection, then focusing on whether a Roth conversion this year makes financial sense or not.

Just schedule a quick call – Click Here

-David Hicks

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