Why You May Want to Consider a Roth Conversion Now

Posted on October 1st, 2020

Tax policy will play a big role in the election.  The current tax rates are due to sunset after 2025.  That means for most taxpayers, there will be an increase in taxes in the future.  Should there be a change in administration after this election season, there is a possibility the rates will sunset sooner, and other tax cuts may be rolled back for top income earners. In general, the low tax rate environment coupled with the elimination of the stretch IRA has created favorable conditions for Roth Conversions.

The idea is to lock in the lower tax rate now by converting some of your traditional IRA to Roth. You’ll pay taxes at today’s rate on the amount converted. Roth IRAs are an important planning tool because not only do they grow tax free, distributions in retirement are tax-free.  The conversion of a traditional IRA to Roth will reduce or eliminate required minimum distributions (RMDs) resulting in lower taxable income down the road.

Those with a 401(k) that includes a Roth option may want to consider an in-plan conversion.  Participants should reach out to their plan administrator to see what options are available in their plan.

Non-spouse beneficiaries of IRAs and 401(k)s can no longer stretch inherited distributions over their lifetime.  Instead, they are required to liquidate the inherited account within 10 years of the account owner’s death. The result is larger distributions that will likely push them into higher tax brackets.  The beneficiaries of Roth IRAs will not be subject to taxes on the distributions.

Should there be a change in administration, those considering a Roth conversion may want to do it this year, before any changes to tax policies occur.   After election season we will reach out to clients regarding their specific situation and discuss which options are best.