A Golden Opportunity For A Roth Conversion

by | Nov 27, 2018 | Roth, YouTube

 

In today’s blog post and video, Ashley takes a look at why now is a golden opportunity to consider a Roth conversion. Tax rates “might be the lowest you’ll see for the rest of your life”, creating a window of opportunity to convert to a Roth – a window that may only last for a couple years.

You’ll learn:

  • Why 2018 & 2019 may be ideal for partial or full Roth conversions
  • How much time is left to complete a Roth conversion for 2018. Hint: time is running out!
  • Why anyone (regardless of income) can do a Roth conversion
  • Next steps to explore whether or not a Roth conversion is right for you

Click here to watch the full video or read the full video transcript, below.

Transcript

I read an article recently in MarketWatch. It’s called, “How the new Tax Law Creates a Perfect Storm for Roth IRA Conversions.” The article says today’s federal income tax rates might be the lowest you will see for the rest of your life. That’s a pretty bold statement and here’s why. Donald Trump may or may not be re-elected in 2020. If he’s not re-elected in 2020, and the Democrats still control congress at that time, there is a really good chance that the tax cuts in jobs act could be neutered or reversed altogether. It’s a very critical window of time that you have in 2018 and 2019 to look at, seriously look at… Roth conversions.

Roth Conversions – A Golden Opportunity

Today’s topic is a golden opportunity for Roth conversions. My name’s Ashley Micciche. I’m the CEO of True North Retirement Advisors where we help business owners sell their businesses and transition successfully into retirement.

Why Now? Why It’s A Good Time To Convert To A Roth

A couple weeks ago I was talking to a potential client. We were talking about all the tax changes that have happened in the last year with the tax cuts and jobs act and how that’s going to impact their situation going forward. I realized, in talking with this particular client, that there is this golden opportunity for Roth conversions in 2018 and 2019. The reason is that taxes, for a lot of people, are going to be going down. In other words, now is an ideal time to look at making a Roth conversion because tax rates could be as low as they’re going to be… maybe in your lifetime.

No More Taxes – The Long-Term Benefit Of A Roth Conversion

Here is why you would want to get as much into a Roth as you possibly can – whether that’s through contributions or in this case of converting your existing 401k or IRA balance to a Roth. That money you pay taxes on, the amount that you convert today, is not taxed again for the rest of your life. So, in 10, 20 years, whenever you retire and you start drawing money out of your investments, say it’s all in a Roth IRA at that time, you’re going to pay zero dollars in taxes on those distributions from your Roth IRA.

On the other hand, if you maintain a traditional IRA or a traditional 401k in your retirement years, that money that you take out for income and retirement is going to be taxed. Therefore, you could be taxed at 30, 40%, depending on what rates look like in the future.

No RMDS! Roth IRAs Don’t Have Mandatory Distributions

Another reason why you would want to get as much into a Roth as you possibly can is because on that money, you’re not going to be mandated to take out withdrawals from your Roth IRA when you turn 70 1/2. Consequently, Uncle Sam forces you to start taking money out of your traditional IRA and 401k accounts at 70 1/2. This is with few exceptions and you will pay taxes on that money that you take out. Therefore, this is not an ideal situation! It makes a lot of sense to get as much money into the Roth as you possibly can.

Converting In 2018 – Time Is Running Out!

If you want to do a Roth conversion for the current calendar year, we’re in 2018. That window of time is rapidly running out. You can only do a Roth conversion in the calendar year. The deadline to do a conversion for 2018 is December 31st.

Another really great strategy that works really well, especially if you have a large balance in your IRA and you don’t want to take the tax hit all in one year, is spreading it out over multiple years. You can do some in 2018 and some in 2019. However, if taxes remain low, ideally you could stretch it out for longer than that, but I wouldn’t plan on it. If there’s a specific amount, let’s say you want to convert like 200,000 dollars of your IRA and you can stomach the tax bite over a two to three year time period on that conversion, then that would be ideal. Even though you can stretch it out for longer than that.

Making The Conversion – Does It Make Sense For You?

The bottom line here with deciding on a conversion and whether or not it makes sense for you is to talk to your CPA. They’re going to know your tax situation and help you determine what the tax bite is going to be this year and potentially next year for making a Roth conversion. A good, competent CPA should be able to tell you relatively quickly what makes the most sense and if this is the best fit or not.

The challenge is figuring out what’s the most I can convert to a Roth IRA, without suffering massive tax consequences and tax liability because you will pay taxes on the amount that you convert today. However, because of the tax cuts and jobs act, those tax rates are lower than they have been in the past but there might be a short window of opportunity to be able to do this.

A Common Myth – Conversions Are Allowed No Matter Your Income

One other bonus point that I want to make here, is dispelling a very common myth. A lot of people who are wealthy or have substantial assets or high incomes, do not consider Roth conversions. They are mistakenly under the impression that they are not allowed to convert to an IRA because their income is too high. Not true. If your income is over a certain threshold, you cannot make a Roth contribution in your IRA.

However, you could make a million dollars a year and convert whatever amount you want to a Roth IRA. That is to say, contributions are different than conversions. A conversion is taking an existing IRA balance and transferring that existing balance into a Roth. That is to say, an IRA – which is capped, is totally different than a conversion that is not capped. They changed the rules on that a few years ago. That’s going to be the case for the foreseeable future, until they change the rules again. There is a very short window of time where you may not be able to do this anymore. Please take advantage and look seriously at a Roth conversion.

Thanks For Watching – Like.  Comment.  Subscribe.

Do you have questions about a Roth conversion? If you do, chances are somebody else probably has a similar question.  If you’re watching on YouTube, please leave a comment. Ask your question. I will respond to every single one. So please like and subscribe to our channel. We put out new videos almost every week and we’d love to have you back next time!

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ABOUT THE AUTHOR

ASHLEY M. MICCICHE, QPFC®, CRPC®, CEXP®

Ashley helps business owners exit their business and retire with financial security. As a Certified Exit Planner she specializes in helping business owners navigate the maze of decisions that need to happen from full-time running their business to retirement.

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