Is a Roth IRA Conversion Right for Me?

How can prudent investors and those with retirement financial plans take advantage of opportunities like a dip in the market? Income taxes for most of us are the largest expense we will have in our lifetime. Reducing income taxation is a key part of a successful financial plan, especially in retirement. You have more control over your income taxes in retirement than in another part of your lifetime. There are some great tax planning opportunities that can be presented here in 2020.

One of those opportunities is looking at the possibility of Roth IRA conversion. Roth conversions were up substantially in the first quarter of 2020¹. More and more people are taking advantage of the current market and converting traditional IRAs to a Roth.

What is a Roth conversion and why is it a good tax planning tool? For example, if you take $50,000 in a traditional IRA and convert it to a Roth IRA, you’ll pay income taxes on the $50,000 this year. Five years after that conversion, that money is income tax free for the rest of your lifetime.

Here are layers of why a Roth conversion may be a good idea with the current market:

1. Stock markets are down. If you are converting now, for the same amount of money you are converting more shares of investments while the market is down. You are taking advantage of the reduced prices to get a better deal on the income taxes in the long-term.
2. Future income tax rates. The US has close to $23 trillion in federal debt. And, we are spending tremendous deficits to try to attack this economic downturn caused by the coronavirus pandemic. The long-term implications of the debt and spending might lead to future income tax rates being higher than they are currently.
3. With the CARES Act, Required Minimum Distributions (RMDs) have been suspended for 2020. If you are 72 or older, you have a one-year window to take advantage while markets are down and you do not have to take those taxable distributions. Maybe you can capitalize on a conversion today to hedge income taxes in the future.
4. Be careful to not overdue conversions. If you are a high-income earner while working, your taxable income could be higher now than it may be in later years. Roth makes sense if your income tax rate in the future is HIGHER than it is now. Evaluate your current and potential retirement income tax brackets to see if a conversion is the right decision for your retirement plan.

Tax planning is so important during retirement, but especially in times like these. You should be looking for opportunities to take advantage of not only from an investment perspective but also from and income tax perspective. This might be a great time for you to do a Roth IRA conversion as part of your retirement planning.