Roth Conversion Instead of Required Minimum Distribution (RMD)?

With the passage of the CARES Act on March 27th, Congress eliminated IRA required minimum distributions (RMDs) for the year. 

This means that many taxpayers above the age of 72, or anyone who is taking inherited IRA distributions, will likely have quite a change in their taxable income in 2020.

We believe that anyone who falls into this category, should seriously consider executing a Roth conversion this year. 

Why might a Roth Conversion be so beneficial this year?

Here are a few reasons we believe a Roth conversion should be considered for those who are not required to take IRA distributions in 2020:

 For the tax year 2020 you may have wiggle room in a lower tax bracket.  You will note in the table below that depending on where your taxable income falls, you may be able to execute a Roth conversion without “jumping” to the next tax bracket. 

In addition, depending on your expected future tax rates, it may be appropriate to consider intentionally boosting your income this year because it will reduce your income tax liability in future years.

Beginning in the year 2026, tax brackets will be “sunsetting” back to higher 2017 tax rates.  That’s correct, without Congressional intervention, current tax rates are already scheduled to increase beginning in 2026. 

These scheduled tax hikes will eliminate the 12%, 22%, 24% and 32% brackets and replace them with the 15%, 25%, 28% and 33% brackets respectively.  In addition, the highest tax bracket will bump back up to the 39.6% rate (from 37% now).

So in looking forward at where tax rates are headed, it may be favorable for many to go ahead and take advantage of lower tax brackets now.  One of the best options for accomplishing this strategy may be a Roth conversion.

The SECURE Act created a less favorable distribution schedule for those who inherit IRAs.  You might recall that on December 20, 2019, Congress passed the SECURE Act. 

One of the less favorable provisions of the SECURE Act is that individuals who inherit IRAs are now required to fully distribute them within 10 years. The 10 year distribution requirement is much less favorable than the prior law that allowed individuals to “stretch” taxable distributions from inherited IRAs over their lifetime (which could extend for 20 or more years). 

When thinking about intra-family tax planning, Roth conversions can facilitate maximizing low tax brackets now for the beneficiaries of your IRA.  While beneficiaries of Roth IRAs are also required to take distributions based on a 10 year distribution schedule, funds withdrawn from a Roth are not taxable.

2020 is truly a year with lots of tax planning opportunities!