Does it make sense to do a Roth Conversion this year?Submitted by Mission Financial Planning on April 27th, 2020
When investments are down, one financial strategy is to convert your traditional IRA to a Roth while the value is reduced so you pay taxes on the decreased value. If and when the market rebounds, that rebound will be in the Roth’s tax-free environment.
It's an interesting strategy, and usually most effective when you are in a lower tax bracket now than you anticipate in the future.
With many businesses closed or on reduced schedules, including all of our clients’ dental practices, this may be a year of reduced income and lower tax brackets for many. Some may also see the conversion as a hedge against future stimulus-related tax increases. The years between retirement and the start of RMDs can also work well. If you’ve been thinking about converting your IRA to a Roth, this may be a timely opportunity.
The biggest hurdle to converting a traditional IRA to a Roth is the thought of paying those taxes now. Income taxes are levied on the converted amount. In a lower-income year while the market is down it may be harder than usual to come up with the money to pay income taxes on the conversion.
How much should you convert? We look at the rest of your tax picture, other retirement accounts, future income needs and estate considerations to make that call.
- How far are you from hitting the next tax bracket, or the next big jump in tax brackets?
- What marginal tax rate will you be paying in the future?
- Do we anticipate RMDs in excess of what you’ll need in retirement?
- Will this be an IRA that goes to kids or a non-spouse beneficiary?
- Where will the money for taxes come from?
The answers will inform our recommendation.
If you would like to run through the numbers and discuss whether the strategy makes sense for you, give us a call. Paying taxes to convert some of your IRA to a Roth while the market is down, particularly if it’s a low tax-bracket year for you, may make sense within a long term financial plan.