Current Thinking

Good Window of Opportunity for Roth IRA Conversions

The Roth IRA is a powerful tax-favored retirement option since it can offer a hedge against future tax-rate increases. But beyond tax planning considerations, Roth IRAs have several important advantages over traditional IRAs:

  1. Unlike a traditional IRA, a Roth IRA distribution is tax-free if you’ve had the account open at least five years, and reached the age of 59½, become disabled or died.
  2. You can make contributions to your Roth IRA after age 70½, depending on whether you fall within the earned income limits.
  3. Roth IRAs are not subject to the traditional IRA rules for required minimum distributions at age 70½.

The Internal Revenue Code allows IRA owners to convert significant sums from traditional IRAs to Roth IRAs. But you have to follow these important rules (among others):

  • The ability to contribute tails off at higher incomes. For 2019, the eligibility to make annual Roth IRA contributions is phased out between modified adjusted gross income (MAGI) levels of $122,000 to $137,000 (unmarried individuals) and $193,000 to $203,000 (married joint filers).4
  • The conversion is treated as a taxable distribution from your traditional Doing a conversion likely will trigger a bigger federal income tax bill and possibly a larger state income tax bill. However, today’s lower federal income tax rates might be the lowest you’ll see in your lifetime, and the tax benefits of avoiding higher taxes in future years may extend to family members after death.

Many tax experts suggest that the best reason to convert some or all of your traditional IRA to a Roth IRA is if you believe your tax rate during retirement will be the same or higher than what you are paying currently. Since you’re no longer allowed to reverse a Roth IRA conversion, it’s important to understand the tax ramifications. Talk to your tax advisor before taking any action.

TRADITIONAL VS. ROTH IRA: HIGH-LEVEL COMPARISON

Here is a simplified comparison of IRA rules and tax benefits. Remember, tax laws are complex and subject to change. Consult a tax advisor about your individual situation before taking action.

 

Traditional IRA

Roth IRA

Age limits for contributing

You must be under 70½ to contribute.

You can contribute to a Roth IRA at any age.

Income limits for contributions

Your contributions can’t exceed the amount of income you earned in that year or other IRS-imposed limits.

Your contributions can’t exceed the amount of income you earned in that year or other IRS-imposed limits, and can be reduced or eliminated based on your modified adjusted gross income.

2019 tax-year contribution limits

If you are under age 50, you can contribute up to $6,000. If you are older than age 50, you can contribute $7,000. (Limits can be lower based on your income.)

If you are under age 50, you can contribute up to $6,000. If you are older than age 50, you can contribute $7,000. (Limits can be lower based on your income.)

Claiming deductions on tax return

You may be able to claim all or some of your contributions.

You cannot deduct your Roth IRA contribution.

 

Source: Bill Bischoff, “How the new tax law created a ‘perfect storm’ for Roth IRA conversions in 2019,” MarketWatch.com, Jan. 16, 2019. https://www.marketwatch.com/story/ how-the-new-tax-law-creates-a-perfect-storm-for-roth-ira-conversions-2018-03-26

About the Author

Paul Pesile

As part of our Consulting Services team, Paul works with clients to develop effective plan design and benefit compensation strategies, manage plan level modifications, and build employee awareness and appreciation for retirement programs. Additionally, he is a regular speaker on various retirement topics at industry conferences and events.