The ability of taxpayers to move funds from a Traditional IRA to a tax-free Roth IRA is one of the great underpinnings of our current tax code. Is NOW the right time to use Roth conversions to your advantage? Alex Perny of Advanta IRA shares information to help you decide.

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Roth Conversions and The CARES Act—Is NOW the Right Time to Convert?

The COVID-19 pandemic has brought about unprecedented economic disruption, leaving many individuals questioning the status and direction of their retirement savings. With the passage of The Coronavirus Aid, Relief, and Economic Security (CARES) Act in March 2020, new opportunities and considerations have emerged for those looking to secure their financial future.

One notable opportunity is the option of doing a Roth conversion. A Roth conversion involves moving funds from a traditional Individual retirement account (IRA) or other pre-tax retirement plans into a Roth IRA. This conversion generally comes with a tax liability, as the funds in a traditional IRA have not been taxed yet. The advantage, however, is that the funds in a Roth IRA grow tax-free and can be withdrawn tax-free in retirement.

The CARES Act has introduced certain provisions that make Roth conversions even more attractive. One of the key changes is the suspension of required minimum distributions (RMDs) for 2020. Traditionally, individuals over the age of 72 (or 70 ½, for those who reached the age before January 1, 2020) were required to start withdrawing a minimum amount from their retirement accounts each year. These RMDs were subjected to income tax. However, with RMDs being waived this year, individuals have the opportunity to convert funds to a Roth IRA without adding to their taxable income for 2020.

This presents a unique opportunity for individuals who believe their taxable income this year will be lower due to the economic downturn caused by the pandemic. By converting funds now, individuals can effectively take advantage of their lower tax bracket and potentially pay less tax on the converted amount compared to what they would have paid in previous years.

Furthermore, considering the current low tax rates, it may make sense to accelerate the payment of taxes during a Roth conversion, as there is a possibility that tax rates will increase in the future to help cover the government’s financial deficits resulting from the pandemic.

However, before making a decision regarding a Roth conversion, it is essential to evaluate one’s individual circumstances and consult with a financial advisor or tax professional. Factors such as current and projected income, cash flow needs, and long-term retirement goals should be carefully considered.

It is also crucial to note that Roth conversions are not reversible. Once the funds have been moved to a Roth IRA, they cannot be transferred back to a traditional IRA or retirement plan. Therefore, individuals need to be confident in their decision and consider their liquidity needs in the short term.

While the current economic climate has created uncertainty and concerns for many individuals, it has also opened up new possibilities. The combination of Roth conversions and the provisions within the CARES Act can provide advantageous opportunities for those considering securing their financial future. By leveraging these opportunities wisely, individuals can potentially minimize their tax burden and set themselves up for a more prosperous retirement.