Provided by DJ Lee, CFA
Difficult times may open doors to new possibilities. Businesses are changing their ways of operating, and individuals are exploring new avenues for investment. It may be time for you to consider some opportunities, as well.
What is a Roth Conversion? A Roth conversion refers to the transfer of an Individual Retirement Account (IRA), either Traditional, SIMPLE, or SEP-IRA, into a Roth IRA. With Roth IRAs, you pay tax on the money before it transfers into the account.
One benefit to having your money in the Roth IRA is that, unlike a Traditional IRA, you currently are not obligated to take Required Minimum Distributions (RMDs) after you reach age 72 (RMDs would be required to any non-spousal beneficiaries, however).
Another benefit is that since the money was taxed before going into the Roth IRA, any distributions are tax-free. Keep in mind that tax rules are constantly changing, and there is no guarantee that Roth IRA distributions will remain tax-free.1,2
Why Go Roth in 2020? In the face of the market downturn after the COVID-19 outbreak, you may be in a unique financial situation. For example, suppose you have an IRA account that was worth $1 million before the downturn, but it’s currently worth $800,000.
Perhaps your income has also decreased, potentially putting you in a lower tax bracket. Maybe you own one or more businesses, such as restaurants, that have been closed. You may not yet know if these businesses will be opening again in 2020. Your income could hypothetically be considerably lower this year than last year.
But: this may present an opportunity. Less earned income may mean lower total taxes due on a Roth conversion, especially if the overall account value has dropped.
Keep in mind, this article is for information purposes only and is making an assumption on an IRA account’s value and applying a hypothetical drop in earned income. We recommend you contact us before modifying your retirement investment strategy.
No Turning Back. While this may be a good time for you to consider converting to a Roth IRA, remember that there’s no turning back once you do. The Tax Cuts and Jobs Act of 2017 decreed that Roth conversions could no longer be undone.3
A Roth IRA conversion is a complicated process, and it’s wise to involve a trusted financial professional. Please feel free to reach out to us with any questions you have about your situation.
DJ Lee is an Investment Adviser Representative of American Wealth Management (“AWM”), an SEC‐registered investment adviser. Any opinions or views expressed by Mr. Lee are solely those of Mr. Lee and do not necessarily reflect the opinions or views of AWM or any of its affiliates, or any other associated persons of AWM. Any such views are subject to change without notice. You should not treat any opinion expressed by Mr. Lee as investment advice or as a recommendation to make an investment in any particular investment strategy or investment product. Mr. Lee’s opinions and commentaries are based upon information he considers credible, but which may not constitute research by AWM. Mr. Lee does not warrant the completeness or accuracy of the information upon which his opinions or commentaries are based.
Neither Mr. Lee nor AWM has any duty or obligation to update the information contained herein. Further, no representations are being made, and it should not be assumed, that past investment performance is an indication of future results. Moreover, wherever there is the potential for profit there is also the possibility of loss.
This article is for informational and educational purposes only and should not be used for any other purpose. The information contained herein does not constitute and should not be construed as an offering of advisory services or an offer to sell or solicitation to buy any securities or related financial instruments in any jurisdiction. Certain information contained herein concerning investment product types, economic trends and performance is based on or derived from information provided by independent third‐party sources. Neither Mr. Lee nor AWM can guarantee the accuracy of such information and neither Mr. Lee nor AWM have independently verified the accuracy or completeness of such information or the assumptions on which such information is based.
This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.
1 – Investopedia.com, November 26, 2019.
2 – Investopedia.com, January 17, 2020.
3 – Congress.gov, December 22, 2017.