One question I have been asking my tax clients is: “Have you considered a Roth conversion?”
With wider tax brackets and lower tax rates currently in place, now may be the ideal time to convert traditional retirement accounts to Roth status.
I have been working with my clients to take advantage of what I have informally called “bracket busting.” This is a strategy where we examine your current tax situation and determine how much of your tax bracket remains unused. We then look at the taxation of what a withdrawal from a traditional retirement account would mean for additional tax and analyze if it makes sense to convert this amount to a Roth.
What does it take to do a customized analysis? I would need a copy of your 2019 tax return and information from 2020, including your most recent pay stub. I would also need to know about any changes that occurred in 2020 that may affect your tax situation (increases or decrease in pay, investment account changes, inheritances, etc.).
Required Minimum Distributions (RMD)
Roth is a great way to avoid taxation – for you and your heirs. A Roth account does not mandate Required Minimum Distributions (RMD) at age 72, so you are never required to remove funds from this account. A Roth account grows tax free and the gain is not “taxed later” but rather taxed NEVER! There isn’t another way to pass money from one generation to another that provides such a robust benefit. By combining a Roth account with your overall legacy plan, you can accomplish your goals and reduce the amount of tax paid.
Tax Now vs. Tax Later
The number one reason I have heard from individuals against completing the conversion is that they do not want to pay the tax now. However, at the time of your passing, your heirs could each lose up to 37% of their share of your hard-earned money to the government. As current tax law stands, in 2026 this rate will increase to 39.6%. By completing a conversion to Roth and paying the tax now, you are avoiding Uncle Sam being a part of your estate plan, or at a minimum, reducing his presence.
Taxes are at what could be considered an all-time low, so it may make sense to take advantage of the remaining room you have within your tax bracket. Keep in mind, conversions must be completed by December 31, 2020. Schedule your appointment now to review your personal analysis.
More on Retirement Accounts
While we’re on the subject of Roth conversions, you may have retirement account decisions to make based on employment changes in 2020. Here’s a handy blog from the Walkner Condon wealth management team about your options with your 401(k) or employer-sponsored retirement account if you’ve changed jobs or been laid off.