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Is Now The Time for a Roth Conversion?

Roth Conversion

With the world and global markets in upheaval, is now the time for a Roth conversion? Converting assets to a Roth IRA can make sense in a number of instances. A Roth conversion refers to taking all or part of the balance of an existing traditional IRA and moving it into a Roth IRA.

Key Points
  • Will you be in a higher tax bracket when you retire?
  • Are RMDs required this year, and if not, will your conversion make a difference?
  • Are there lower market valuations?

Types of IRA

There are a couple of types of IRAs. The traditional IRA is pre-tax, and you are taxed on the final outcome when you take distributions. Traditional plans allow for an upfront tax break, which lessens your tax burden for that year. All income and gains earned by your investments grow on a tax-deferred basis.

The Roth IRA is post-tax and works slightly differently, allowing tax-free withdrawals in retirement. The current economic climate makes the Roth IRA exhibit particular advantageous. With a Roth IRA, there are no taxes on distributions on an account open for at least five years, if the holder is over the age of 59 and 1/2. It is possible to generate tax-free cash flow during times of financial crisis.

Roth Conversion

Loans, stocks, real estate and other assets can be converted to a Roth IRA and taxes will be due at the current, lower valuation. It is possible to lock in tax free income and gains as an asset becomes a Roth asset. Lower market valuations might make 2020 a good year to consider whether a Roth conversion is a good strategy for one’s assets.

Because stock market declines mean account values for traditional IRA Accounts will likely be reduced, a higher percentage of the account can be converted to a Roth IRA under the lower tax rates. They can then be allowed to grow tax-free while market conditions improve. If, as is likely, the market does eventually rebound, the benefits will be enjoyed as Roth assets.

CARES Act

The CARES Act requires RMDs on retirement accounts to be waived for 2020; this means less taxable income in 2020. So, any taxable income for the year would not include RMDs and could therefore be offset by any taxes incurred on a Roth Conversion.

Converting assets to a Roth can make sense especially if someone will be in a higher tax bracket when they reach retirement. Additionally, it can make good financial sense for those wanting to maximize their estate for their heirs.

Time for Roth Conversion

The time may be right for you to do a Roth conversion. However, it’s up to you to make that determination. It’s best to work with a financial advisor to decide if the tax burden is worth it. Of course, you can choose to contribute to both a traditional and Roth IRA. This will help diversify your portfolio even more.

Roth Conversions and Roth IRA information can be obtained by speaking to one of the specialists with IRA Financial Group, reachable here via email and here via phone.

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