- The sweeping tax overhaul enacted in 2017 lowered tax rates starting with the 2018 tax year. These lower rates are scheduled to end with the 2025 tax year.
- The Setting Every Community Up for Retirement Enhancement (Secure) Act eliminated the ability to stretch an inherited IRA for most non-spousal beneficiaries and requires that these beneficiaries fully withdraw the money in the IRA within 10 years. This applies to inherited Roth IRAs as well, but there is no tax to the beneficiaries in most cases with an inherited Roth IRA.
- There are many unknowns as to what impact President Joe Biden’s tax proposals might have on rates, making Roth IRAs a viable option for many investors.
Here are 4 signs that the time may be right for Roth IRA conversion:
1. You earned less than usual this year.
A key issue to consider is your tax bracket for the year. If you are still working and fall into a lower-than-normal tax bracket, that can present an opportunity to do the Roth IRA conversion at a lower tax rate then you would incur during a more normal earning year.
2. You have retired but want to delay Social Security.
One time period where you might be in a lower tax bracket is your first few years of retirement. Your income is likely lower due to not receiving a salary or self-employment income. If you’ve decided to delay taking Social Security to maximize its benefit, this could provide a window of several years in which you are in a low tax bracket.
It is important to know that if you have reached the age where RMDs have commenced that the RMD money cannot be diverted to a Roth IRA conversion and that RMDs must be taken before any conversions are done.
3. You want to donate to charity.
Along the lines of managing your tax bracket, if you plan to give appreciated assets to charity, the tax deduction from these donations can be used to offset the tax hit of the Roth IRA conversion. It’s important that you are able to take an itemized deduction for the contribution, however.
4. You have cash on hand.
While it probably goes without saying, it’s critical that you ensure you have the cash available outside of your IRAs to pay the taxes. Having to take money from your traditional IRA to cover the taxes due will reduce the net amount that is ultimately converted to a Roth.
Additionally, the money to pay the taxes would end up as a distribution from the traditional IRA in this case. That money would be subject to taxes and to a 10% early withdrawal penalty if you are under age 59 ½. This type of situation would greatly diminish the benefits of a Roth IRA conversion and should be avoided in virtually all cases.