Roth Conversions: A Compelling Case Under Current Tax Rates
The appeal of Roth conversions has endured, especially under the current tax rates. With expiring provisions of the Tax Cuts and Jobs Act at the end of 2025, lower taxes on conversions, and no required minimum distributions (RMDs) for Roth IRAs, it’s an attractive option.
A Game-Changer for IRAs and Roth IRAs
The Secure Act was a game-changer for IRAs and Roth IRAs. It introduced a new obligation for beneficiaries to empty accounts within a decade of inheritance. Secure 2.0 made some changes around the edges. According to Sarah Brenner, director of retirement education with Ed Slott & Company, “The Secure Act changed the game, and it has definitely led to a stronger case for Roth conversions.”
Ripping Off the Band-Aid
For traditional IRA owners, the situation is like ripping off a Band-Aid – it’s better to get the pain over with. Clients often have a misconception that they need to do it all at once, but partial conversions are also an option. Brenner advises, “You work with the rules you have, and you have a 10-year rule.”
Tax Experts Weigh In
Certified public accountant and planner Joseph Doerrer wrote in the Journal of Accountancy, “Though considerations around Roth IRA conversions have changed as a result of the Secure Act, Roth IRAs still offer advantages to account owners and beneficiaries.” Sheryl Rowling, a CPA, planner, and technology firm founder, agrees, “Now is the time to do Roth conversion planning.”
A Huge Advantage
Roth conversions offer a huge advantage over traditional accounts. Clients never need to take RMDs from their Roth IRAs when they’re alive. For those inheriting Roth accounts, the compressed timeline to empty the IRAs within a decade arrives alongside distributions that won’t affect their taxable income.
Proactive Planning
Brenner suggests proactive planning. “I could just let that Roth IRA sit there and grow for 10 years and then everything would be accessible to me tax- and penalty-free.” With historically low tax rates, it’s a good time to think about converting taxable traditional IRAs.
A Simple Calculation
The decision comes down to a simple calculation: the money is going to be taxed at some point. Brenner notes, “You are going to have to pay a tax bill when you convert. No one likes paying taxes unless they absolutely have to.” However, it’s better to do it on your schedule rather than someone else’s.
Leave a Reply