What are some of the things we should consider that could improve our financial picture before 2020 ends?

A Roth conversion before the end of this year could have a real impact on many retiree’s future income. Under the 2017 Tax Cuts and Jobs Act, we are in historically low income tax brackets in 2020.  This makes a Roth conversion more attractive.  A general guide is if you think you are paying lower taxes today than you will be paying in the future, then you should take a serious look at a Roth Conversion.

A Roth conversion is when you convert money from a traditional IRA to a Roth IRA.  The downside is that tax will be due now on the amount you convert.  But the positive is that from this day forward your money will grow tax free inside the Roth IRA.  So basically you are deciding to pay the tax now rather than later at possibly a higher tax rate.

Before doing anything, you have to know what the tax bite will be in the year you convert.  There is no longer a provision to recharacterize.  Once it is done, you cannot go back and undo it.  In making a decision of whether to convert or not, you will want to stay in the lowest tax bracket possible.  We talk about filling the bracket.  Tax brackets have a range of income.  So for example, if your regular income lands right in the middle of a tax bracket, you have some space you could fill up with a Roth conversion and stay inside that bracket.

Large Traditional IRAs are particularly problematic when it comes to taxes.  Required distributions can force out significant taxable income each year in retirement after age 72.  You could lay out a plan to make partial conversions over several years in order to reach your conversion goal.  It is possible to mitigate the future tax, by doing a series of conversions at a lower tax rate than you anticipate paying in the future.  This could save you thousands of dollars in taxes over your lifetime.

The Tax Cuts and Jobs Act not only lowered the tax rates in each bracket, it also expanded the brackets on a joint return.  This was an attempt to relieve what was called the marriage penalty in the past.  The result is a larger window for some taxpayers to convert IRAs.  

The current tax law with its lower and expanded brackets is set to sunset – that is expire – in 2025.  But it could be gone sooner under a new administration in Washington.   That is why taking advantage of a Roth conversion this month could be an opportunity for taxpayers with large IRAs.  There is no age limit and no income cap on the ability to do Roth conversions.  

It is unlikely that taxes will be lower in the future than they are today, for most taxpayers.

 Written by Connie C. Guelich, CFP, AEP, CLU, ChFC.  This represents our views at the time of this writing, and it is subject to change.  It is not intended to be personal investment advice.   If you would like to discuss your own account, please don’t hesitate to call us.  We are here to help and welcome your call.