On the face of it, both strategies seem to produce $1.2 million after tax a decade into the future. However, the Roth is better for two reasons. First, Taxpayer A can pay his $400,000 in taxes on conversion from a taxable account (assuming he has one) and thus can convert the full $1 million from the regular IRA into the Roth IRA for a payment of $400,000 in taxes to the U.S. government. Ten years from now, he will have $2 million (instead of $1.2 million) in the Roth that can be distributed tax free.

Next, assume Taxpayer A anticipates that 10 years from now the tax rates will have increased to 50%. At that point, the $2 million regular IRA will trigger $1 million in taxes, leaving just $1 million after taxes.

If the tax rates go down rather than up, a Roth conversion ends up looking less attractive next to the strategy of keeping the money in the IRA. But at the moment, The Greek’s betting line is favoring a tax increase—and that is definitely the right way to bet it.

The amount you can contribute to an IRA or a Roth IRA is currently $6,000 per year ($7,000 if you are age 50 or older). You need to make this contribution from “compensation” you earned during the year. Roth IRAs also have some restrictions based on your income. Your Roth contribution amount is phased out in 2021 (extremely quickly) at between $198,000 and $208,000 of modified adjusted gross income for married couples filing jointly.

Many employer retirement plans, including 401(k) plans, 403(b) plans and 457 government plans, allow designated Roth contributions. The contribution limits for a qualified plan are currently $19,500 per year ($26,000 for those age 50 and older).

This contribution limit is not affected by a person’s filing status or adjusted gross income as it would be in a Roth IRA. Note that Roth IRAs don’t have minimum required distributions until after the original IRA owner’s death, while a Roth retirement plan will generally be subject to required minimum distributions (with a special rule that postpones the RMDs if and while you are still working for the employer that sponsored the plan).

It’s important to keep in mind that a tax-free return becomes more exciting whenever the effective income tax rates rise.

Moreover, a Roth would become even more advantageous if current policy proposals come to fruition that eliminate a step-up in the basis of assets at the owner’s death: Whereas highly appreciated assets in an estate would eventually trigger gain on the full appreciation, a Roth in effect allows for tax-free growth in a wide range of common investment assets.

Remember, again, that even though the taxpayer who funds a Roth IRA does not have required minimum distributions, the beneficiaries will be subject to them.

Opportunty Zones
Opportunity zones were added to the Internal Revenue Code by the Tax Cuts and Jobs Act of 2017 and immediately became part of the American tax vernacular. Opportunity zones allow investors to put money into distressed areas and offer three specific tax incentives to do so:

The first incentive is deferral. Any capital gain in a qualified opportunity fund is deferred until the date that the taxpayer sells or otherwise terminates the interest in the fund (this is called an “inclusion event”) or otherwise deferred until December 31, 2026, whichever comes first.

The second incentive is tax basis adjustments: If the taxpayer invests in a qualified opportunity fund for at least five years, the outside tax basis increases by 10% of the original gain—and the added basis reduces the gain recognized when the deferral ends. (The original bill said there could be an additional 5% increase in basis if the investment lasted for at least seven years, but that was no longer possible by 2020.)