There are a few good reasons to consider a Roth IRA conversion this year. In fact, tax expert Dean Mioli said there has never been a better time to do so.
In reaching that conclusion, Mioli, director of investment planning for Independent Advisor Solutions by SEI in Oaks, Pa., points to the uncertainty of the Covid-19 crisis; the CARES Act, which changed the annual limitations for cash contributions to charity; and a potential Joe Biden victory, which would likely lead to higher taxes on the wealthy.
But chief among the reasons why a Roth IRA conversion is so attractive now are all-time low tax rates, he said.
“What the current tax rate is and what the future tax rate is going to be are really the major drivers when you talk about Roth conversions, and I am certainly in the camp that [thinks] we will see higher taxes in the future,” said Mioli, noting that means more tax would be paid on taxable IRA distributions than the tax that would be paid on a conversion at a lower rate.
The Covid-19 crisis, Mioli said, is another important reason to get the Roth conversion out of the way, as the crisis is going to reverberate for years and trillions of dollars will be spent to deal with it. Doing a Roth conversion today, he said, removes the uncertainty of what future tax rates might be. “And if we do see an increase in tax rates, then tax-free Roth Ira income will only be more valuable,” he said.
People who dropped out of the 35% bracket and are now in the 12% or 22% bracket—a situation many people may be in because of job or business losses due to the pandemic— should take advantage of the lower rate brackets, he said. “Do the Roth conversion and then, when, of course, you get back to normal ... you got this Roth conversion done on the cheap,” he said.
The change in the annual limitations for cash contributions to charity brought on by the CARES Act is one more reason the Roth conversion is so attractive this year, Mioli said. The CARES Act eliminated the 60% of adjusted gross income (AGI) limit on cash contributions to charitable entities such as churches or synagogues for those who itemize, Mioli said, noting that now you can deduct 100% of AGI in cash to charity. This allows individual to convert the IRA and make a charitable gift equal to the amount of the taxable conversion, which would wipe out the income tax on the conversion.
As an example, Mioli explained that if you did a Roth conversion for $20,000 and paired it with a $20,000 cash charitable contribution, the charitable contribution eliminates the Roth conversion income. “So essentially you get a free Roth conversion,” he said.
“If you are thinking about doing a Roth conversion and you are charitable inclined, bringing these two ideas together can really set you up for a tax savings powerhouse,” Mioli added.
This is especially an optimum time to think about doing a Roth conversion for the 2% of Americans who are making more than $400,000—those who would be most impacted by a Biden victory in the presidential election, he said.