It’s a great day for a Roth conversion, or is it?

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If you are like most and believe income taxes, social security taxes and capital gain taxes must all go up in the near future, then you may want to consider converting taxable accounts to tax-free accounts ASAP. Incidentally, income taxes are the lowest they’ve been in decades. So … why wouldn’t you convert your IRA, 401k, 457, 403b or SEP before your taxes increase?

The question is how much longer is Uncle Sam going to allow these tax-free accounts to exist? We know from past history when tax laws change the existing rules are grandfathered in. We trust the same will prevail. 

Here are just a few of the facts that could make the difference in your decision:

  1. Taxes on the conversion will become due the following year and are counted as income.
  2. Most financial institutions will allow partial conversions annually.
  3. Paying the tax on this conversion is always best paid from cash/savings accounts but not mandatory.
  4. To avoid putting yourself in a higher tax bracket it is best to do this when you have a good idea of what your annual income will be, (November or December) then you’ll know what you should have in savings to pay the tax on the conversion.
  5. Once the Roth IRA is established you have a five-year waiting period before the gains are tax-free. However, the original deposits removed would remain tax-free if you required money.
  6. Once the tax-free Roth IRA is established you can add to it each year without resetting the 5-year waiting period.
  7. If possible, it’s also best to convert to a Roth when the stock market is in a correction or a recession. Remember, the lower the value of the security, the lower the taxable income.
  8. You are almost never too old to convert an IRA to a Roth IRA especially if legacy planning is a priority or your spouse is considerably younger.
  9. A Roth IRA would pass tax-free to a spouse with no forced distribution over their life.
  10. A Roth IRA would also pass tax-free to a non-spouse heir, but must come out of the Roth IRA within 10 years.
  11. Many 401k plans allow the participate to convert the plan directly to a self-directed Roth IRA without first transferring the funds to a regular IRA.
  12. Be advised if you convert after the age 65 and you are on Medicare, the income increase could increase the cost of your Medicare coverage.
  13. A Roth IRA conversion must be done by 12/31/2020 for a 2020 tax return.

Over my 20+ years of service in this industry, I’ve always tried to help people through a Roth conversion because there’s no better money than tax-free money in retirement. However,  now with the current increase of $4 trillion in the budget deficit combined with lower income taxes, it would appear this may be the perfect time to consider a Roth IRA conversion.

Of course, if you are still working and have had a Covid-19 related hardship there are other tax related benefits available to you. For instance, up to three years to pay the tax on a Roth IRA conversion.

I am sure your current advisor has already discussed all of these options with you but if not we would be honored to help you create your own tax-free retirement. My hope is these tips have been useful to you and the ones you love the most.  If you have further questions, don’t hesitate to email me directly at fhschilling@seniorguardian.com or contact our office at the number(s) below. 

Frederic “Ric” Schilling is a Florida native, born in Jacksonville, Fl. Ric is President and founder of Senior Guardians of America, a local North Florida firm specializing in tax reduction, long term illness planning, asset protection, probate avoidance and life income planning. Ric is a National Speaker and Advocate on Senior Issues and has been featured by the Florida Times Union and WJXT, TV-4 in Jacksonville as an authority on Estate Planning and Retirement Issues. Senior Guardians has an A+ rating with the Better Business Bureau and is a member in excellent standing with the National Ethics Association. Ric Schilling is a Certified Financial Fiduciary (CFF). You may contact Ric at 904-371-3302 or 888-891-3381   Please visit: www.seniorguardian.com

This article is not intended to give tax or legal advice. Securities offered through Center Street Securities, Inc.

(CSS), a registered  Broker-Dealer & member FINRA & SIPC. Investment Advisory Services offered through Center Street Advisors, Inc. (CSA), a SEC Registered Investment Advisor. Schilling and Associates (d/b/a Senior Guardians of America) and CSA are independent of CSS. 

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