It’s been a long year for me personally, and I haven’t had the chance to keep this website as up to date as I wanted to due to many personal reasons. However, today I came across an article on US News that I knew I just had to come and put in perspective that had to do with new IRA conversion rules.
If you’ve listened to anyone in the profession, you’ve heard the notion to convert your traditional IRA plan to a tax-free Roth account. However, this year there is a small rule change you should know about.
A conversion done in 2018 or onward can no longer be reversed, which means your decision just got a bit harder if you were on the fence about doing so.
Another wrench thrown into the equation has been the raging stock market (well, until lately) which has driven up many tax bills from conversions, essentially forcing people to pay taxes today and eliminate the taxes when the funds are taken out of a Roth IRA.
Further complicating this for many people, the new tax law gave a lot of investors a lower tax bracket, which will reduce the tax on a conversion and therefore give them thoughts of making the conversion happen.
How to Navigate This Tax Change
“We have new tax rates, tax brackets, new standard deductions, lost exemptions and new AMT rules,” says Jennifer E. Myers, president of SageVest Wealth Management in McLean, Virginia. “It’s a different ball game that requires detailed planning to avoid unintended tax consequences.”
“We’ve had clients ask us about conversions over the past several months and for many it makes sense to explore the opportunity,” says Derek Bostian, a planner with Two Waters Wealth in Huntersville, North Carolina.
The people who really need to think about this long and hard are people who are close to age 70.5. At this point in time, traditional retirement accounts require that you have to pay tax on the minimum distribution requirements. We also don’t know if Congress will keep tax rates where they are, so that muddies the thought process even more!
401k plans, as well as traditional IRA’s offer a tax deferral on any gains made in the account until the cash is withdrawn after the age of 59.5. Most of them also offer a tax deduction on contributions (I personally use a self directed IRA). This allows the account to compound and grow but not be taxed until the withdrawal year, so it’s a sexy investment being you save on taxes now and kick the actual tax payments far down the road.
Suggested Reading: Roth IRA vs 401k.
A Roth IRA does not offer any deduction on contributions but also won’t charge any tax on the way out. You must meet the requirements to open a Roth account and the limits are very low – you can contribute only $5,500 per year unless you are post age 50, where you can put in $6,500 currently. There is something called the backdoor Roth conversion which I explain on this page.
For assistance with this, and all other tax and retirement matters, I do suggest you talk to a CPA or Financial Planner who knows your direct situation.