The days of “stretching” the individual retirement account are long gone. But the appeal of Roth conversions is here to stay – especially under current tax rates.
The expiration of provisions of the Tax Cuts and Jobs Act at the end of 2025 that mean lower taxes on the conversion, the fact that Roth IRAs do not carry required minimum distributions and, of course, the tax-free withdrawals for the owner or their heirs add up to a compelling case, said Sarah Brenner, director of retirement education at the consulting firm Ed Slott & Company. The first Secure Act was a “game changer for IRAs and Roth IRAs” because of the new requirement for beneficiaries to empty the accounts within ten years of inheritance, and Safe 2.0 “I made some changes around the edges,” she said in an interview.
The situation for traditional IRA owners is “kind of like ripping off a band-aid,” where they “just have to get rid of the pain,” Brenner said, noting that clients often have the misconception that “you have to do it all” , even though “it’s not all-or-nothing” because they could simply do a partial conversion as well.
“The Secure Act has changed the game, and it has absolutely led to, I would say, an even stronger case for it Roth Conversionsshe added. “You work with the rules you have, and you have a ten-year rule.”
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After four consecutive years reducing implementation of that rule, the IRS has indicated that it will go into effect early 2025. Next year is already shaping up to be one of the most consequential for tax policy in decades, due to the potential demise of lower tax brackets and many other parts of the budget. Tax Cuts and Jobs Act that will be high on the agenda of the next occupant of the White House and of the lawmakers in control of Congress.
Tax experts have praised the continued virtues of Roth conversions since the passage of the first Secure Act in 2019.
“Although the considerations surrounding Roth IRA conversions have changed as a result of the Secure Act, Roth IRAs still provide benefits for account owners and beneficiaries,” certified public accountant and planner Joseph Doerrer wrote the following year in the Journal of Accountancy. “Roth IRAs are tax-advantaged, and owners of Roth IRAs don’t have to do that take RMDs. This can be useful in retirement as it allows a greater amount of assets to remain in the account. Not having to take RMDs can also help account owners avoid unwanted taxable income, giving them more flexibility in retirement. Beneficiaries will enjoy a simpler tax situation, compared to beneficiaries of traditional IRAs, due to the tax-free nature of their distributions from the account.
The policies that led to more tax revenue flowing into the federal treasury are now impacting the personal financial decisions of advisors and their clients in the wake of the two Secure Acts, wrote Sheryl Rowling, a CPA, planner and tech company founder . last year for Morningstar.
“Now is the time to start Roth conversion planning,” Rowling said. “By delaying retirement distributions, your clients can have additional years to convert IRA funds to Roth at lower tax rates. These changes all seem to encourage, and even require, a greater emphasis on Roth rather than pre-taxing retirement contributions. While this means more money will have to be made as IRS contributions (or conversions) are made, the ability to permanently exclude future growth (and previously taxed principal) from tax, coupled with the elimination of RMDs, could help in the long run. term should be a big win for taxpayers.”
The Roth conversion offers a “major advantage” over traditional accounts because customers “never have to withdraw RMDs from their Roth IRAs while they are still alive,” Brenner noted. For those who inherit Roth accounts, their “highly compressed timeline” to empty the IRAs within 10 years comes along with distributions that will have no effect on their taxable income, she said.
“I could just let the Roth IRA grow there for ten years and everything would be accessible to me tax and penalty free. This is the kind of proactive planning people can do. Right now we have historically low numbers. tax rates We don’t know how long that will last,” Brenner said. “It’s a good time for people to think about converting their taxable traditional IRAs.”
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For advisors and their clients, the decision comes down to a simple calculation that the “money will be taxed at some point,” she noted.
“You will have to pay a tax bill if you convert. No one likes to pay taxes unless it is absolutely necessary,” Brenner said. “Someone is going to have to pay taxes at some point, so it’s good to do it on your schedule.”
