Is your financial advisor calling you? One of the things we’ve been intentionally focused on during the bear market and economic recession is calling clients who will benefit immensely from a Roth Conversion.

Roth Conversions can be a powerful tax and retirement planning technique.  The idea behind most Roth Conversions is to take money from an IRA and convert it to a Roth IRA.  Essentially, you’re paying taxes today instead of paying taxes in the future.

So, when stocks are off the highs in your IRA, why not pay taxes on these low amounts and convert them over to your Roth?  It is the right time now.  Once the stocks are in the Roth, and you meet certain requirements, the money grows tax free and can be taken out tax free down the road.

What’s Not To Love About That?

The Tax Cuts and Jobs Act lowered taxes for many Americans and with the SECURE ACT Roth’s became even more powerful as an estate planning vehicle to minimize taxes, so it’s a convenient time to take advantage of Roth Conversions.  For example, if you convert your entire IRA account between the age of 60 and 72, you will no longer be required to take minimums out each year with rising taxes on the income and will enjoy tax free money growing and at your disposal for life.

However, Roth Conversions can come with some issues.  Before you engage in one, be aware of this common problem as it can be hard to undo the transaction.

Conversion after Age 72

IRA’s and Roth’s are both retirement accounts.  It’s easy to assume Roth Conversions are best suited for retirement, too.  However, waiting too long to do conversions can actually make the entire process more challenging.

If you own an IRA, it’s subject to required minimum distribution rules once you turn 72, as long as you had not already reached age 70 ½ by the end of 2019.  The government wants you to start withdrawing money from your IRA each year and pay taxes on the tax-deferred money.  However, Roth’s are not subject to RMD’s at age 72 (required minimum distributions).  This is what many people overlook.

If you don’t need money from your RMD to support your retirement spending, you might think, “I should convert this to a Roth so it can stay in a tax-deferred account longer.”  Unfortunately, that won’t work.  You can’t roll over or convert RMD’s for a given year.  So, if you owe a RMD in 2020, you need to take it and you cannot convert it to a Roth.

Despite the fact you can’t convert an RMD, it doesn’t mean you can’t do Roth conversions after age 72.  However, you need to make sure you get your RMD out before you do a conversion.  Your first distributions from an IRA after 72 will be treated as RMD money first.  This means, if you want to convert $10,000 from your IRA, but you also owe an $8.000 RMD for the year, you need to take the full $8,000 out before you do a conversion.

We’ve had clients convert hundreds of thousands of dollars from an IRA to a Roth in one single year as it made sense for them personally.

 

As always, please don’t hesitate to contact your portfolio manager regarding the capital markets and your investments.

Blake Parrish, CFP®
Senior VP, Portfolio Manager
Phone: (503) 619-7237
E-mail: blake@bpfinancialassoc.com

Certified Financial Planner Boardof Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.”