Currently, six factors are converging to make Roth IRA conversions more promising for more IRA owners than ever before.
No Required Minimum Distributions (RMDs) For 2020
The $2 trillion dollar Coronavirus Aid, Relief, and Economic Security Act (CARES Act) temporarily suspends the RMD requirement from Traditional IRAs and retirement plans. If you were required to take minimum distributions from your IRAs in the past, consider foregoing that distribution in 2020 unless you need the money and depend on it for your cash flow. That will help stem losses from having to take your RMD while the market is down. If you are receiving your RMDs through monthly automatic transfers from your IRA to your checking, you might want to stop those transfers too. With respect to Roth IRA conversions, not taking distributions from a Traditional IRA can make doing a Roth IRA conversion even more desirable because it might keep or put you in a favorable tax bracket by reducing your taxable income. If you were already planning on a Roth IRA conversion perhaps this will give you an opportunity to convert an even larger amount.
Converting To Roth While The Market Is Low
History suggests that after a crash, even if it takes years, there will be a significant recovery. If the market does go up after you make a Roth IRA conversion, you will in effect be getting your Roth IRA at bargain rates. Let’s say you have a Traditional IRA that is invested in a low-cost index fund that was valued at $133,000 at its peak and today its value is $100,000. You can make a Roth IRA conversion on the $100,000 and pay tax on $100,000. The market rebounds to its pre-crash level and now your Roth IRA is worth $133,000. You just got a great bargain by paying tax on $100,000 and getting a $133,000 tax-free Roth IRA in return.
Our Current Low Tax Rates Are Likely To Go Up
Most of our Roth IRA conversion analysis assumes that the federal income tax rate is going to stay steady for a few years at least. But the $2 trillion bailout casts a shadow over that assumption. Who is likely to pay for it? Not the poor. If history is any indication, not the billionaires either. It will probably be some combination of you and your heirs, people with large IRAs and retirement plans and other high-income taxpayers. Between our current deficit and the new $2 trillion bailout, it isn’t a huge leap to think tax rates will go up in the future. In addition, we are already in a historically low tax environment. In 2017, a married couple filing jointly with a taxable income of $326,600 was in the 33% tax bracket. Thanks to the Tax Cuts and Jobs Act of 2017, today that couple would be in the 24% tax bracket. If you make a Roth IRA conversion now and income tax rates go up in the future, you will have made a Roth IRA conversion at bargain rates. If you think tax rates will increase over the long run and specifically increase for you, then Roth IRA conversions can be a great idea.
Roth’s Are A Great Defense To The SECURE Act
The SECURE Act, which could more accurately be called the IRA and Retirement Plan Extreme Death Tax Act, took effect January 1, 2020, and accelerates the income tax on Inherited IRAs within, subject to exceptions, ten years of the owner’s death. This could devastate your financial legacy. Roth IRA conversions are one of the best defenses against the SECURE Act.
Love or Not, You Won’t be Married Forever
If you are married, you are most likely taking advantage of the favorable “married filing jointly” tax rates. But what happens when one spouse dies? Other than the fact the survivor will only receive one Social Security benefit rather than the current two benefits, the household income itself will likely be similar. But, the year after the first spouse dies, the survivor will likely be filing as a single taxpayer, at higher income tax rates. That would not be the best time to make a Roth IRA conversion. The fact that you are filing jointly now and either you or your spouse will likely be filing as single later, means that now would be a favorable time to make a Roth IRA conversion.
