Should You Do a Roth Conversion in 2020? – Cravitz Financial & Insurance Solutions

Should You Do a Roth Conversion in 2020?

Video Transcript:

Hey everybody. It's Ryan here. All right. So today I want to talk to you about Roth conversions and specifically whether it makes sense for you to possibly consider doing a Roth conversion this year, in the year 2020.

All right. So first let me just state this in general about Roth IRAs. And I apologize upfront if you've heard me say this more than once. But I absolutely love Roth IRAs. I mean, who does not love tax-free income? Right? Keep in mind when you take money out of a Roth IRA in retirement, through the form of a qualified distribution, you don't have to pay any income taxes whatsoever on that withdrawal. And not only that, but with a Roth IRA, you don't need to worry about required minimum distributions. So in retirement, Roth IRAs are great, not just from a tax standpoint, but they're also great from a flexibility standpoint as well, by not needing to take out the required minimum distributions.

So the question is again, should you convert this year to a Roth IRA, this year in 2020? So let me give you a few reasons why you might and a few reasons why you might not. So here's why you might. If you're going to be in a higher tax bracket when you retire. Now, none of us know what our future tax rates are going to be. But one thing you can think about is where your future income in retirement is going to come from.

So I'll give you an example. Many people have done an excellent job of saving and investing and accumulating large sums of money inside of their pre-tax 401(k) accounts, or maybe it's a 403(b), or 457, just depending upon where you work as to what type of plan you might have. But if you funded one of these accounts on a pretax basis, remember, in retirement, when you go to take a withdrawal from these accounts, you're going to have to pay the taxes associated with the withdrawals that you take. And those withdrawals are taxed at ordinary income tax rates.

So what you may want to consider is introducing a Roth IRA into the mix of what you're doing for retirement if you don't already have a Roth IRA, because this is kind of what I call tax diversification. If all of your money is coming from income sources that are fully taxable at ordinary income tax rates, you lose a lot of flexibility by not having any tax-free income coming over to you. So definitely, if you're going to be in a higher tax bracket when you do retire or anticipate that you will, you definitely want to consider possibly doing a Roth conversion.

One thing to keep in mind is that if you're going to do the conversion, make sure that you have the money to pay the taxes though in an account outside of your retirement account. Preferably just sitting in a savings account or maybe in a checking account or something like that. So you can just write the check to pay the taxes this year, assuming you do the conversion this year.

Another thing to think about is where are you going to live. Keep in mind, different states have different state income tax rates. And many people are choosing to move to different states when they do retire. Some states have no state income tax. Some states have a very high state income tax. So if you're in a low state income tax state right now and you're going into a high one, then that might be another reason why you might want to consider doing a Roth conversion.

So those are just some thoughts on that side. Some thoughts as to why you might not want to convert is, well, first off, if you're going to be in a lower tax bracket in retirement than you are today, then you might not want to make that conversion. If you've done a great job of saving in a Roth IRA or a Roth 401k or whatever the case might be, and that's where substantially most of your income is going to come from, you may not need any more money on that side. What I have often found is, and this is not going to be the case for everybody, but what I have often found is that introducing some sort of mix into the equation, some tax diversification into the equation so that when you do retire you have some money that's coming from taxable accounts and some money that's coming from tax-free accounts. It can really help your planning as far as helping to minimize your overall income taxes in retirement and to help your money last longer.

Now let me give you one last reason why you may not want to convert. And that is if you think that you may need to access the money within the next five years. Look, if you do the conversion and then you go to take a withdrawal from the Roth IRA, you could owe penalties to the IRS. So you need to make sure that you understand how that works as well.

Look, there's no doubt about it. Roth IRAs can be an excellent retirement and tax planning type of tool. But they're not always right for everybody in every situation. So if you have questions on this, would like to discuss, you're not sure if you should do the conversion or not. And quite frankly, it's a big decision because under the new rules, there are no take backs. So if you decided to do the conversion and then you change your mind afterwards, there's really nothing that you can do. So if you want to reach out to me, discuss your situation, have questions, please feel free to do so. Until next time, take care. And I will see you soon.


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