Without a doubt, the past few years—and probably the rest of this decade—will ultimately be memorialized in the history books as quite unique, given theread more
Waived 2020 IRA Required Distributions Present Possible Planning Opportunity
October 14, 2020
This year’s CARES Act exempts required annual distributions in 2020 for all IRA owners over age 70 ½, and for some people, this may create an attractive planning opportunity utilizing the Roth IRA conversion.
Unlike a traditional IRA that is funded with pre-tax dollars that grow tax deferred until withdrawn (as taxable income), a Roth IRA is instead funded with after-tax dollars and allowed to grow (and ultimately be withdrawn) fully tax free. Funds in a Roth IRA are currently not subject to any growth limit restrictions and there is no required annual distribution for a Roth as there is with a traditional IRA. Given its attractiveness, though, the IRS has limited the availability to contribute to Roth IRAs only to individuals with earned income at or below $139K in 2020 (or up to $206K if married filing jointly). However, the ability to convert an existing traditional IRA (or some portion of it) to a Roth is not restricted by any income limits. Despite the inherent benefits of the Roth IRA, there is one important factor to consider about making any such conversion; the amount being converted is treated as ordinary income in the year of the conversion.
Essentially, converting a traditional IRA (whether fully or partially) to a Roth is about paying taxes on retirement savings now rather than in the future. Therefore, some investors may benefit more than others if they have less taxable income in 2020 versus 2019 given their ability to forgo the normal required minimum distribution (RMD) this year. Plus, since many are already paying their 2020 estimated taxes based on 2019 income amounts (with safe harbor equaling 110% of the previous year), it might make sense to convert at least a portion of the IRA equal to what the 2020 RMD amount would have been. The ideal candidate for a Roth conversion in 2020 is someone who does not need to use their 2020 RMD and who will not see a material change in taxes owed from 2019 to 2020, given the tax impact of the Roth conversion.
In our view, 2020 might also be a relatively attractive time to convert to a Roth IRA because tax rates could climb in the near future given some campaign remarks; besides, the 2017 Tax Law is scheduled to sunset in the not-too-distant year of 2025. Lower market values also generally make a Roth conversion attractive—to move it over before future appreciation occurs—and while there has been a solid market rebound from earlier in the year, the recent volatility has put the major equity indexes (as of the end of Q3) not far from January 2020 values. Moreover, targeted transfers of securities that are still down in 2020 would be ideal candidates to convert. Furthermore, the SECURE Act of 2019 made changes to non-spouse inherited traditional IRAs that may create greater tax burdens than they did before, with heirs of these traditional IRAs now being required to fully withdraw over a 10-year period, rather than over their own lifetime. Granted, a Roth IRA’s inheritor must generally withdraw the entire account over a 5-year period, but those withdrawals are tax free as long as the account has been open for at least 5 years before the original Roth IRA owner’s death. Hence, an heir receiving some portion of their inherited retirement accounts in Roth form may have less tax burden in the decade following receipt.
While a Roth conversion may not be beneficial for everyone this year, it should be a topic discussed with your CPA and Wealth Manager during year-end planning. With 2021 fast approaching, the deadline for a 2020 Roth conversion is December 31st; however, custodians are usually extremely busy at year end, so we recommend initiating any possible conversion as soon as possible.
Articles and Commentary
Information provided in written articles are for informational purposes only and should not be considered investment advice. There is a risk of loss from investments in securities, including the risk of loss of principal. The information contained herein reflects Sand Hill Global Advisors' (“SHGA”) views as of the date of publication. Such views are subject to change at any time without notice due to changes in market or economic conditions and may not necessarily come to pass. SHGA does not provide tax or legal advice. To the extent that any material herein concerns tax or legal matters, such information is not intended to be solely relied upon nor used for the purpose of making tax and/or legal decisions without first seeking independent advice from a tax and/or legal professional. SHGA has obtained the information provided herein from various third party sources believed to be reliable but such information is not guaranteed. Certain links in this site connect to other websites maintained by third parties over whom SHGA has no control. SHGA makes no representations as to the accuracy or any other aspect of information contained in other Web Sites. Any forward looking statements or forecasts are based on assumptions and actual results are expected to vary from any such statements or forecasts. No reliance should be placed on any such statements or forecasts when making any investment decision. SHGA is not responsible for the consequences of any decisions or actions taken as a result of information provided in this presentation and does not warrant or guarantee the accuracy or completeness of this information. No part of this material may be (i) copied, photocopied, or duplicated in any form, by any means, or (ii) redistributed without the prior written consent of SHGA.
All video presentations discuss certain investment products and/or securities and are being provided for informational purposes only, and should not be considered, and is not, investment, financial planning, tax or legal advice; nor is it a recommendation to buy or sell any securities. Investing in securities involves varying degrees of risk, and there can be no assurance that any specific investment will be profitable or suitable for a particular client’s financial situation or risk tolerance. Past performance is not a guarantee of future returns. Individual performance results will vary. The opinions expressed in the video reflect Sand Hill Global Advisor’s (“SHGA”) or Brenda Vingiello’s (as applicable) views as of the date of the video. Such views are subject to change at any point without notice. Any comments, opinions, or recommendations made by any host or other guest not affiliated with SHGA in this video do not necessarily reflect the views of SHGA, and non-SHGA persons appearing in this video do not fall under the supervisory purview of SHGA. You should not treat any opinion expressed by SHGA or Ms. Vingiello as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of general opinion. Nothing presented herein is or is intended to constitute investment advice, and no investment decision should be made based solely on any information provided on this video. There is a risk of loss from an investment in securities, including the risk of loss of principal. Neither SHGA nor Ms. Vingiello guarantees any specific outcome or profit. Any forward-looking statements or forecasts contained in the video are based on assumptions and actual results may vary from any such statements or forecasts. SHGA or one of its employees may have a position in the securities discussed and may purchase or sell such securities from time to time. Some of the information in this video has been obtained from third party sources. While SHGA believes such third-party information is reliable, SHGA does not guarantee its accuracy, timeliness or completeness. SHGA encourages you to consult with a professional financial advisor prior to making any investment decision.