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This May Be The Best Time To Consider A Roth IRA Conversion

Do you want tax-free income in retirement, but have most of your retirement assets in traditional IRA's or 401K's?  Now may be the best time to consider doing a Roth IRA conversion.  Here are some of the factors that make Roth IRA conversions more attractive for IRA owners than ever before.

  • There are no required minimum distributions (RMD's) for 2020.  The CARES Act temporarily suspends the RMD requirement from traditional IRA's and retirement plans.  If you forego taking the distribution, this will help to stem losses that may result from having to take your distribution while the market is down.  If you receive your RMD through monthly automatic transfers from your IRA to your bank account, you may want to stop these transfers as well. 
  • Our tax rates are likely to rise, and most Roth IRA conversion analysis assumes that federal tax rates will remain the same.  The $2 trillion dollar bailout makes that unlikely in the future. We are currently in a historically low tax environment thanks to the Tax Cuts and Jobs Act of 2017. By making a Roth IRA conversion now, and assuming tax rates increase in the future, you will have made the Roth IRA conversion at bargain rates. If you think tax rates will increase for you in the future, a Roth IRA conversion can be a great idea.
  • It may make sense to convert to a Roth IRA while the market is low.  If the market increases after you have made the Roth conversion, you will be getting your Roth IRA at bargain rates.  If you have a traditional IRA that has declined in value, you will be paying tax on the lower market value.  If the market later increases, you received a great deal by paying tax on the lower amount.
  • Since the SECURE Act has accelerated income tax on inherited IRA's to ten years after the date of the owner's death, it may make sense to convert traditional IRA's to Roth IRA's and pay the tax now and be able to receive tax free income in retirement.

Before deciding to make a Roth IRA conversion, make sure that you have the funds available to pay the tax on the conversion.  It is important to keep sufficient liquidity so that you have enough money available to meet your current spending needs. It is important to consult your financial advisor to see if this strategy makes sense for you.

About the Author

Patti Hughes is a Chicago Fee-Only Financial Planner.  Lake Life Wealth Advisory Group provides comprehensive and objective financial planning, retirement planning, and investment management to help clients organize, grow and protect their assets through life’s transitions.  She is a fiduciary, and does not sell products or earn commissions, so she truly acts in the best interests of her clients.