Roundlogo

Allon Planning

August 24, 2020 | Reading Time: 3.0 min

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.

Investment advisory services offered through Foundations Investment Advisors, a registered investment adviser ("Foundations"). The commentary on this blog reflects the personal opinions, viewpoints and analyses of the author, Jay Hagy providing such comments, and should not be regarded as a description of advisory services provided by Foundations or performance returns of any Foundations client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment, legal or tax advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Personal investment advice can only be rendered after the engagement of Foundations for services, execution of required documentation, including receipt of required disclosures. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Foundations manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Any statistical data or information obtained from or prepared by third party sources that Foundations deems reliable but in no way does Foundations guarantee the accuracy or completeness. Investments in securities involve the risk of loss. Any past performance is no guarantee of future results. Advisory services are only offered to clients or prospective clients where Foundations and its advisors are properly licensed or exempted. For more information, please go to https://adviserinfo.sec.gov and search by our firm name or by our CRD # 175083.