It’s very difficult to watch the value of your portfolio decline. We’re all feeling that pain right now. But please don’t overlook a potential opportunity – imagine a substantially lower tax bill in the future. Have you thought about moving funds from your traditional IRA to a Roth IRA? Nobody likes to volunteer for a tax bill – the amount “converted” must be included in your taxable income. However, once the funds are converted to a Roth IRA, future withdrawals are tax-free. There are three timely reasons why you should consider a Roth conversion.
Reason #1 – Falling stock prices. If a Roth conversion otherwise makes sense for you, then you would be wise to consider a conversion while stock prices are low. Without getting into the math, lower stock prices mean a lower tax bill on conversion. Rebounding stock prices inside of a Roth IRA eliminate future gains from taxes.
Reason #2 – Higher tax rates in 2026. The tax cuts of 2018 are scheduled to “sunset” in 2025 – meaning that we will be facing higher tax rates in 2026 (unless Congress changes the law or extends the tax cuts). You probably know that all pre-tax traditional IRA funds must eventually get taxed – but a Roth conversion can ease that future burden for you.
Reason #3 – SECURE Act passed last December. Congress passed the SECURE Act during the last week of 2019, and this eliminated the “stretch” IRA concept. Through 2019, your children inheriting a traditional IRA could “stretch” IRA distributions over their lifetimes – thereby minimizing the tax impact. Not anymore – now your children inheriting your IRA must empty it within 10 years. Many children inherit IRA funds during their peak earning years – therefore, much of your traditional IRA could be diverted to the government in taxes. A Roth conversion doesn’t eliminate the new 10-year distribution rule, but it will eliminate taxes for your children or grandchildren.
One last reason to consider a Roth conversion: there are no required minimum distributions on Roth IRAs for you and your spouse. You determine when to take distributions, not the government.
I know it’s difficult to look at your account values right now, but now could be a very good time to take some positive steps to strengthen your financial future.
 There are certain age and time-period rules that must be followed to obtain all tax-free benefits from a Roth IRA.
 Please consult with your tax advisor before converting to a Roth IRA. Higher taxable income from conversions can cause unintended consequences, such as higher Medicare part B premiums. This doesn’t mean that a Roth conversion doesn’t make sense, but it’s best to go into a conversion with an understanding of all tax issues.