Tax laws are constantly changing and the current proposals, if passed, will have significant changes to tax rates, tax brackets, and the treatment of retirement plans.
With all of the proposed changes, it would be beneficial to have an analysis done of your current accounts to determine if a conversion from your pre-tax retirement accounts to a Roth retirement account makes sense for you.
Some of the advantages of a Roth retirement account over a pretax retirement account are that earnings in the Roth account are exempt from income tax and if the account is a Roth IRA, there is no requirement for required minimum distributions (RMDs).
Current tax law changes that are being proposed would increase tax rates, potentially limit Roth conversions in the future, as well as eliminate some allowable contributions to Roth accounts. The proposals also include a reduction of the lifetime estate tax exemption from $11,700,000 to either half that amount or even as low as $3,500,000.
By performing a Roth conversion, it would have the added benefit of reducing your taxable estate. You may also be affected by a provision in a previous budget bill that could require you to remove money from your retirement accounts if they exceed a certain dollar amount, which a Roth conversion will also assist with.
Your situation may be more advantageous to convert all of your eligible retirement accounts at one time or by implementing a plan to convert a portion of your accounts over a period of years by taking advantage of the tax brackets and by performing a dollar-cost averaging of your investment portfolio.
Performing a Roth conversion is not only an investment issue, it is a tax issue and an estate planning issue. The timing of the conversion, timing of tax payments, and other administrative issues should all be considered prior to the conversion. Having a knowledgeable and experienced financial and tax professional assist you through this process can help you avoid some of the mistakes that can be made and help you obtain the greatest benefit to you and your family.
Unlike contributions to an IRA with a deadline of your tax filing date, a Roth conversion must be done during the calendar year to take advantage of the current tax laws. So, act now to make sure that if a Roth conversion would benefit you that you have the time to complete the transaction before the end of the year. Failure to complete the transaction before year-end will subject you to the new potential tax rates as well as potentially make your account ineligible for conversion based upon the new tax laws.
If you would like a complimentary analysis of your retirement accounts to see how a Roth conversion could potentially benefit you, please feel free to reach out to me. Just because the goalposts are moving does not mean that the game is over.
Traditional IRA account owners have considerations to make before performing a Roth IRA conversion. They primarily include income tax consequences on the converted amount in the year of conversion and withdrawal limitations for future contributions to a Roth IRA. In addition, if you are required to take a required minimum distribution (RMD) in the year you convert, you must do so before converting to a Roth IRA. This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
The above is the opinion of the author and should not be relied upon as investment or legal advice or a forecast of the future. It is not a recommendation, offer, or solicitation to buy or sell any securities or any investment strategy. It is for informational purposes only. The above statistics, data, anecdotes, and opinions are assumed to be true and accurate. Grand Canyon Wealth Management does not warrant the accuracy of any of these.
Michael J. Day CPA PFS™ is the founder of Grand Canyon Wealth Management, where he provides financial planning, estate planning, wealth management, insurance, and investment services. For more information, or toschedule a complimentary consultation, visit grandcanyonwealthmanagement.com, call (480) 590-3590, or e-mail Michael.j.day@lpl.com. You may also follow him on Twitter @GrandCanyonWM. Securities and advisory services provided through LPL Financial, a registered investment advisor member FINRA/SIPC. Grand Canyon Wealth Management is not an affiliate company of LPL.