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Roth conversions in 2020 could help your retirement plan

June 10, 2020

2020 may be a year that none of us ever forgets, for many reasons. But here’s one positive: Roth IRAs can be particularly beneficial for financial planning in the current tax and economic environment. A major incentive for investors to move assets from traditional IRAs and 401(k) plans to Roth IRAs is the promise of tax-free income in retirement and tax-free growth during earning years. Roth IRAs also have no required minimum distributions, so your funds can simply continue to grow if you don’t need to use them to live on. 

Roth IRAs typically offer these benefits, but for certain investors they may be particularly appealing this year. Here’s why:

Historically low federal income tax rates. When you convert funds from a traditional retirement account to a Roth IRA, you only pay income taxes on the funds in the year you roll the money over. After that, it’s never taxed again. Right now, taxes are lower than they’ve been historically and are slated to stay that way until 2025, thanks to the federal Tax Cuts and Jobs Act (TCJA). 

Potentially lower tax bracket. If you’ve experienced a reduction of income or job loss in 2020, you may have dropped to a lower income tax bracket.  That could mean paying even less tax on funds converted to a Roth IRA.

Reduced financial liability during a market downturn. Although you do have to pay taxes on the amount you decide to convert from a traditional retirement account to a Roth, the market downturn may actually help you. That’s because the lower your account balance, the less tax you pay. Then, once the investments in your new Roth account recover, the gains are all yours, tax-free.

Is a Roth IRA conversion right for you this year? If you think it might be, let’s connect!