• Tim Lofton

Roth Conversions Remain Timely Ahead of Likely Tax Increases


President Joe Biden has pledged to raise taxes for higher-income Americans and corporations, but even if his proposals win the support of Congress, they likely won’t take effect until the 2022 tax year. That makes Roth IRA conversions continue to look attractive for several types of clients who think their tax rate may go up next year or later.

Roth conversions captured attention last year when an unexpected opportunity arose from the CARES Act. The legislation Congress passed to offer relief from pandemic hardships allowed eligible clients to suspend required minimum distributions (RMDs) for tax year 2020, creating a window where they could instead convert some or all of that money into after-tax Roth accounts at a historically low tax rate. However, the RMD relief ended with the close of the 2020 year.

Nevertheless, there are numerous reasons to identify clients who still could benefit from moving Traditional IRA funds into a Roth IRA in 2021.

Our tax team has identified three types of clients that might benefit from Roth conversions:

Retired Clients in Their ‘Gap’ Years: Clients who are in their “gap” years, meaning they’ve retired but haven’t started taking RMDs or Social Security. They are ideal candidates for a Roth conversion due to a typically lower tax bracket. As such, clients can transfer some of their retirement funds to a Roth account to take advantage of the temporarily lower taxes before the client starts RMD's. Additionally, the Roth conversion removes pressure for forced distributions later in life and erases the tax burden on beneficiaries of the account.

• Younger Clients with Smaller Traditional IRA: Converting now from a 'pre-tax' IRA in a today's favorable tax environment not only allows for tax-free growth of the Roth account funds over their lifetime. This also allows a client to start completing annual Roth IRA conversions, once their future income climbs above the maximum allowed by the IRS for regular Roth contributions.

• Business Owners & High-Income Earners Struggling During the Pandemic: These clients experienced lower income or losses last year, and are having trouble recovering financially as coronavirus cases and restrictions persist into 2021. Similar to the "gap-year" retirees, clients may consider using their current drop in tax bracket to maximize the benefits of a Roth conversion while the tax impact from moving the assets into an after-tax Roth account is reduced.

Tax planning should occur throughout the entire year, but it’s especially crucial early in a new year to present financial planning clients with relevant ideas on how to manage their tax burden, shortly before returns are filed.

Our process, The Retirement Blueprint™, provides specialized planning to our entire client base, of which, tax planning plays an integral role in our comprehensive service offering.

Our tax planning process begins with the review of a client’s tax return and identifying opportunities that may allow strategies to reduce future tax burdens.

While tax planning is only part of the picture in a comprehensive plan, it is often overlooked in the world of investment planning as most firms do not have an integrated tax partner working with clients. We have found that having a fiduciary in each area of the practice is essential in providing a true holistic plan. Those areas include fiduciaries in Estate Planning, Tax Planning, Investment Management and Financial Planning.



If you would like to sit down with our team, you can click the link to the right to schedule today:

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