Whether you are in the early stages of building your retirement nest egg or you are lucky enough to have already accumulated a significant amount of assets in tax-preferential accounts, this could be a good time to consider having some of the funds located in after-tax or “Roth” accounts. Tax-diversification allows for greater flexibly when it comes to withdrawal strategies, and it can save lots of hard earned money down the road.
Even if you spent some years diligently saving and growing money in a Traditional IRA, it is not too late to take steps to enjoy the benefits of a Roth IRA. Currently, there is no income limitation to this strategy, so even if you are phased out of Roth IRA contributions, you are still eligible to make a Roth Conversion.
If you are subject to Required Minimum Distributions (RMDs), you probably have heard that the requirement is waived for 2020 due to the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). If you are older than 72 and you have taken a distribution from your IRA within 60 days, you can roll it back into your traditional account or you can convert it to a Roth IRA.
What makes this a great time to consider a conversion?
Converting when the market is low adds an additional bonus to the transaction. Nobody has a crystal ball to predict the stock market’s direction, but historically a crash is followed by a recovery. You are essentially paying taxes on a lower market value, and whatever is converted keeps growing tax-free for as long as you are able to let it grow. Remember, one of our favorite parts about a Roth accounts is that under current law you are not required to take RMDs.
What would be the reasons NOT to do a conversion this year?
The amount you are converting is considered taxable income, and, if you are anticipating this year to be disproportionally high in terms of taxable income, for example you sold your company this year, this may not be a good time for the move. There are other reasons that may be specific to your goals and financials, so it is advisable to consult your CPA or your financial advisor before converting, as it is no longer permissible to “undo” the conversion.”