The year of the pandemic has created a sense of urgency about lots of things, including people’s health, finances, education … practically everything.

But it’s also forcing people to rethink their tax planning, and it has created a huge opportunity for converting clients’ traditional IRAs into Roth IRAs, according to a number of financial advisors who wrote in to Financial Advisor.

Why now? Because federal legislation has waived required minimum distributions this year. At the same time, small-business owners, especially those working in industries like food and retail, are likely seeing themselves fall into lower tax brackets. That means they might pay less to convert their traditional IRAs into Roths now, in order to get an overall lower tax bill on retirement monies in the future.

The Coronavirus Aid, Relief, and Economic Security (CARES) Act, waived required minimum distributions that retirees would otherwise have to have taken from their retirement plans (they must start taking these distributions at age 70½). The IRS has also allowed those who have taken these distributions already this year to roll them back into their plans by August 31, 2020.

Advisors say that converting retirement money, and paying the taxes on it in lower brackets now, will help protect you from higher tax brackets later. Overall, you keep more in your pocket.

“From a tax planning standpoint, it’s probably the greatest year ever since the tax reform to do Roth conversions,” said John Bohnsack, an advisor at Briaud Financial Advisors in College Station, Texas. “There’s going to be a lot of people with a lot of really low income, whether it’s because of [reduced] business income or required minimum distributions being waived.”

Which means creating some taxes whose rates you can control is probably a good thing to do this year, he said.

While going all the way and paying zero taxes might seem appealing, too, it’s not necessarily efficient. On Bohnsack’s blog, he uses the example of a hypothetical couple taking out $100,000 in retirement distributions and $30,000 in Social Security (85% of which is taxable). With the standard deduction of $27,400, the taxable income adds up to $102,600, and the tax comes to $14,152 at a marginal rate of 22% for couples.

Wait until next year, and you’re going to be back in that 22% bracket. However, he says, if the couple takes out $77,500 this year, all else being equal, the taxable income comes to $80,100 and the tax liability is $9,217. The marginal couples’ rate is 12%.

Again, the key is to think of the higher tax rates you avoid in the future, and now politics come into play. The Tax Cuts and Jobs Act and its attractive tax brackets will go away in 2025, said Alex Koury at Hosler Wealth Management in Scottsdale, Ariz.

“The current tax brackets are set to expire in 2025, and if they are not extended it is likely taxes will go higher,” Koury said. “Our national deficit and debt [have] exploded this year.” Another reason to avoid future brackets, in other words.

Another reason to consider Roths is that the SECURE Act did away with stretch IRAs, which forces those who inherited individual retirement accounts to remove their funds within 10 years rather than stretching out the distributions over time, a strategy that allowed lower taxes and more favorable estate planning. That puts even more pressure on retirees to get money out of taxable funds at lower brackets.

“The important thing to note,” said Leon LaBrecque, an advisor with Sequoia Financial Group in Troy, Mich., “is that the optimal Roth conversion amount is usually the amount to get to the edge of the next tax bracket. We use this 'bracket topping' strategy frequently and the results are useful.”

The best candidates for conversions, said Bohnsack, are retirees with brokerage assets at maybe $50,000, $60,000 or $70,000, that don’t have to take required minimum distributions this year. “We know for sure they are going to be in a [higher] tax bracket next year,” he said, maybe back at 22% to 24%. So to put them in a 12% tax bracket this year “seems like a fat pitch to swing at.”

He said his firm estimates that it did 10 to 20 conversions last year. After reviewing 86 clients that waived RMDs, he said, “my guess is that we could do upwards of 40 to 50 conversions this year.”

Christopher Cortese, an advisor with Wescott Financial Advisory Group in Philadelphia, said this has been a good talk to have with clients in their early 70s.

“We have started to reverse or completed reversing RMDs previously taken this year as we anticipate some clients will move down two or three tax brackets without their distribution,” Cortese says.

Not So Fast
But don’t get carried away. There are also good reasons not to convert, said Laurie Siebert, a senior vice president and CPA at Valley National Financial Advisors in Bethlehem, Pa. Namely, you forget the benefits you’re going to lose.

Roth conversions, after all, are considered ordinary income. That means you could pump up the tax rate you might be paying on capital gains and qualified dividends and miss out on a zero cap gains tax. You might also get ensnared in Social Security taxes if you pump up income.

There are other reasons to keep your adjusted gross income low. “A lower AGI may reduce Social Security and [income-related monthly adjustment amounts] on Medicare in the applicable year,” Siebert said.

And finally, a lower adjusted gross income for 2020 means you might qualify for a stimulus payment that you otherwise couldn’t have gotten because your income was too high, Siebert said.

“Bottom line, don’t disregard other tax benefits that could be available outside the conversion,” she added.