Even during difficult financial times, opportunity can come knocking at your door. There is very little
doubt that the current COVID19 pandemic has wreaked havoc on the U.S. economy, affecting almost
every individual in its path. With that said, certain events have made 2020 the year to strongly consider
converting any eligible investment accounts into a Roth Individual Retirement Account?
Does a Roth Conversion Make Sense for Retirees?
Under normal circumstances, the conversion of a traditional IRA to a Roth IRA would make little sense
for a retiree with other sources of income. They would be required to pay taxes on the conversion
amount as they take pretax dollar contributions and convert them into a Roth IRA where contributions
are normally taxed upfront with no tax obligation upon withdrawal.
Thanks to the CARES Act, a waiver has been issued for retirees, waving the requirement for them to
take mandatory retirement distributions for the year 2020 only. They can use that waiver as an
opportunity to convert their normal annual distributions from other IRAs and 401K accounts into Roth
IRA contributions without having to pay the taxes normally associated with doing so. That adds up to
tax savings on the amount converted based on the individual’s applicable tax rate for 2020.
How High Earners Can Benefit From Roth Conversions
Under normal circumstances, a Roth investment would offer little value to high earners. Anyone
making over $139,000, or $206,000 if married and filing jointly would actually not be eligible to
benefit from a direct investment in a Roth IRA. This rule also applies to anyone who has no reported
income.
However, there are a couple of ways high earners can benefit from a Roth conversion in 2020. First, it’s
worth noting that President Donald Trump signed a tax bill in 2017 that slashed U.S. tax rates to its
lowest levels in decades. This offers high earners an opportunity to take the tax hit on conversions at
2020 rates, knowing the future income they will earn from their Roth investments will be tax-free when
taking distributions during retirement.
The benefit would be realized if tax rates are higher in subsequent years, which is entirely possible if
Trump loses the 2020 election. With the country closing in on $27 trillion in National Debt, a new
administration would certainly consider increasing tax rates across the board. That would leave 2020 as
the last year a high earner could take advantage of current tax rates under this particular scenario.
Second, there is a “trick” high earners can use to get access to a Roth IRA. By law, there are no current
income restrictions on contributions someone can make to a traditional IRA. There are also income
limits or earnings requirements related to Roth conversions. Strategically, they could invest in a
traditional IRA and subsequently convert that amount to a Roth. That would leave them with future
earnings that would not be subject to income tax. Investment experts refer to this strategy as a
“backdoor” Roth IRA.
Conclusion
As indicated in the opening paragraph, we are living in extraordinary times. As an investor preparing
for retirement, it is incumbent on you to stay abreast of opportunities that might arise to give you
certain tax advantages.
As Congress contemplates how to keep the U.S. economy from flatlining, there will likely be more
favorable tax legislation coming out in the next few months. Under the right circumstances, investment
options like Roth IRAs might become more appealing. This is the time to keep your eyes open for good
opportunities to take advantage of difficult times.
Does your plan meet all your retirement needs? Schedule an appointment now with one of our advisors for a complimentary review of your retirement plan.
Doug Ybema- Grand Rapids Office
Randy Knapp- Okemos Office