Thinking about Converting to Roth IRA? Now May Be the Time.

By Galina Portnoy  |  April 29, 2020

If you’ve thought about converting your traditional IRA into a Roth IRA – now may be the time. Why? Well, with the current downturn in the stock market due to COVID-19, and low tax rates, the conversion is less costly for investors right now.

In a Roth conversion, the fair market value of assets at the time of the conversion will be added to the income for the year it was converted and will be included in the tax calculation for the same year. Since the market is down and portfolio values are low, this added income amount will be less than at other times. Another major factor in a Roth conversion are tax rates. Today’s low tax rates (thanks to tax reform and the Tax Cuts & Jobs Act) will not last forever, especially when you consider that after the COVID-19 pandemic is over, the federal government will need to find ways to recover the assistance it has provided. By converting now, you take advantage of paying a lower tax rate on the amount you convert to a Roth IRA. That’s not the only tax benefit. You reap another a big advantage down the road: the converted funds continue to have tax-free earnings and grow in value, tax-free, when markets rebound, with no capital gains realized if securities are sold and no tax to pay when distributions are taken. Distributions from the Roth IRA will be tax free as long as all of the rules for qualified Roth IRAs are followed.  The great advantage of Roth IRA is that you do not need to take Required Minimum Distributions (RMDs). If you do not get to use the funds in your Roth IRA, your beneficiary would need to follow specific rules to make sure that their distributions are not taxable as well.  Those rules are different for spousal and non-spousal beneficiaries.

But conversion is not for everyone and many factors should weigh in your decision. If you are considering a Roth conversion, bear in mind that income will be increased by this conversion, which may impact some deductions and credits on the tax return, such as taxability of Social Security benefits. It could also increase the amount of Medicare premiums, increase the threshold for medical deductions if you itemize and may trigger some phase-outs. Always consider: (i) whether you expect your income to be about the same or lower/greater in the future, (ii) whether you have enough funds to cover your tax bill with increased income in case of conversion, and (iii) whether you need your money at retirement or whether you have other funds to be used for living. Consult with your tax advisor or Marks Paneth relationship partner for more information on whether converting to a Roth IRA is the right strategy for you during this time.

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About Galina Portnoy

Galina Portnoy, CPA, is a Director in the Private Client Services Group at Marks Paneth LLP.  For more than 20 years, Ms. Portnoy has provided tax, accounting and consulting services to high-net-worth individuals, family partnerships and their related entities. She has advised on a broad range of complex issues, including strategic income tax planning and execution, gifts and estates, philanthropy, matrimonial accounting, business management and planning, real estate and other transactions, multi-state taxation and financial... READ MORE +

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