2020 May Be A Good Time For A ROTH


Even during difficult financial times, opportunity can come knocking at your door. There is very little doubt that the current COVID19 pandemic has wreaked havoc on the U.S. economy, affecting almost every individual in its path. With that said, certain events have made 2020 the year to strongly consider converting any eligible investment accounts into a Roth Individual Retirement Account?

Does a Roth Conversion Make Sense for Retirees?

Under normal circumstances, the conversion of a traditional IRA to a Roth IRA would make little sense for a retiree with other sources of income. They would be required to pay taxes on the conversion amount as they take pretax dollar contributions and convert them into a Roth IRA where contributions are normally taxed upfront with no tax obligation upon withdrawal. Thanks to the CARES Act, a waiver has been issued for retirees, waving the requirement for them to take mandatory retirement distributions for the year 2020 only. They can use that waiver as an opportunity to convert their normal annual distributions from other IRAs and 401K accounts into Roth IRA contributions without having to pay the taxes normally associated with doing so. That adds up to tax savings on the amount converted based on the individual's applicable tax rate for 2020.

How High Earners Can Benefit From Roth Conversions

Under normal circumstances, a Roth investment would offer little value to high earners. Anyone making over $139,000, or $206,000 if married and filing jointly would actually not be eligible to benefit from a direct investment in a Roth IRA. This rule also applies to anyone who has no reported income. However, there are a couple of ways high earners can benefit from a Roth conversion in 2020. First, it's worth noting that President Donald Trump signed a tax bill in 2017 that slashed U.S. tax rates to its lowest levels in decades. This offers high earners an opportunity to take the tax hit on conversions at 2020 rates, knowing the future income they will earn from their Roth investments will be tax-free when taking distributions during retirement. The benefit would be realized if tax rates are higher in subsequent years, which is entirely possible if Trump loses the 2020 election. With the country closing in on $27 trillion in National Debt, a new administration would certainly consider increasing tax rates across the board. That would leave 2020 as the last year a high earner could take advantage of current tax rates under this particular scenario. Second, there is a "trick" high earners can use to get access to a Roth IRA. By law, there are no current income restrictions on contributions someone can make to a traditional IRA. There are also income limits or earnings requirements related to Roth conversions. Strategically, they could invest in a traditional IRA and subsequently convert that amount to a Roth. That would leave them with future earnings that would not be subject to income tax. Investment experts refer to this strategy as a “backdoor” Roth IRA.

Conclusion

As indicated in the opening paragraph, we are living in extraordinary times. As an investor preparing for retirement, it is incumbent on you to stay abreast of opportunities that might arise to give you certain tax advantages. As Congress contemplates how to keep the U.S. economy from flatlining, there will likely be more favorable tax legislation coming out in the next few months. Under the right circumstances, investment options like Roth IRAs might become more appealing. This is the time to keep your eyes open for good opportunities to take advantage of difficult times.

Recent Posts

Archive

Follow Us

  • Grey Facebook Icon
  • Grey Twitter Icon
  • Grey LinkedIn Icon
  • LinkedIn Social Icon
  • Facebook Social Icon

DISCLAIMER

iInformational statements regarding insurance coverage are for general description purposes only. These statements do not amend, modify or supplement any insurance policy. Consult the actual policy or your agent for details regarding terms, conditions, coverage, exclusions, products, services and programs which may be available to you. Your eligibility for particular products and services is subject to the final determination of underwriting qualifications and acceptance by the insurance underwriting company providing such products or services.

This website does not make any representations that coverage does or does not exist for any particular claim or loss, or type of claim or loss, under any policy. Whether coverage exists or does not exist for any particular claim or loss under any policy depends on the facts and circumstances involved in the claim or loss and all applicable policy wording.

 NO RENDERING OF ADVICE

The information contained within this website is provided for informational purposes only and is not intended to substitute for professional advice. In accessing this service, no client, advisory, fiduciary or professional relationship is implicated or established and neither Kilcrease financial,inc nor any other person is, in connection with this site, engaged in any professional services or advice. Internet subscribers, users and online readers are advised not to act upon this information without seeking the service of a professional. kilcrease financial,inc specifically disclaims any liability for any direct, indirect, incidental, consequential or special damages arising out of or in any way connected with access to or use of the website (even if kilcrease financial,inc has been advised of the possibility of such damages), including liability associated with any viruses which may infect a user’s computer equipment.

COPYRIGHT & TRADEMARKS

The trademarks, logos and service marks displayed on this website are the property of kilcrease financial, inc. Users are prohibited from using any of these without the written permission of kilcrease financial,inc. All content on the website is protected by copyright. Users are prohibited from modifying, copying, distributing, transmitting, displaying, publishing, selling, licensing, creating derivative works or using any content on the website for commercial or public purposes.