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  • Phone404-816-7714
  • Address458 E. Paces Ferry RD NE First Floor Atlanta, Georgia 30305
  • Open HoursMonday-Friday 9 AM - 5 PM
Retirement Planning

CARES: Don’t Squander this Retirement Planning Opportunity


Retirement Planning Changes

  • The CARES Act suspended required minimum distributions (RMDs) from employer sponsored and individual retirement plans in 2020
  • Many retirees should expect to see a tax rate reduction this year
  • 2020 presents a once in a potential opportunity to take advantage of a Roth IRA conversion

The CARES Act has amended the rules governing required minimum distributions (RMDs) from qualified plans and individual retirement accounts (IRAs) for 2020. If you are over the age of 72 (previously 70 1/2), you’re probably accustomed to withdrawing a set-forth amount from your IRA each year.

With the new changes, a retiree doesn’t have to withdraw moneys from their retirement account in 2020 should they have no need.


Roth Conversion: The who, what, when, where, and why

  • Who?
    • Anyone with a qualified (pre-taxable) retirement account
  • What?
    • Converting pre-taxable retirement monies to an after-tax retirement account and paying the taxes on it for that year
  • When?
    • At any age
      • Employed but have been furloughed and will experience a lower tax rate that year
      • Lower income/tax rate due to a change in employment (within particular year)
      • Retired and IRS has suspended RMD’s for that year
      • During years of tax breaks/cuts
  • Why?
    • Tax rate is lower the year when converting than what it would be in the future
    • No early withdrawal penalties

Remember the classic childhood tale of the lazy squirrel who takes the summer off while the other squirrel stockpiles acorns for the winter? This is the season for stockpiling – rather than enjoying what could be an exceptionally low tax rate this year, we believe that NOW is the time to be stockpiling in preparation for the winter ahead (or higher tax rates ahead).

The Tax Cuts and Jobs Act (TCJA) passed by Congress in early 2018 includes new tax brackets and rate changes that affect most American families. Though temporary, the individual tax changes are significant (with the law set to adjust back to higher rates after 2025).

If you believe that your rate is higher today than what it would be in the future, you should contribute to a traditional IRA. However, if the belief that your marginal tax rate is lower today than what it might be in the future then one should be considering converting/contributing to a Roth.

In essence, a traditional IRA offers you a tax break on the front end, whereas the Roth gives you the tax break on the back end, with the goal in mind to take the tax break whenever your rate is higher.


Scenario;

John and Jane Doe are 72 years old, retired, and are considering a $45k/year Roth conversion due to the current reduction in tax rates as well as the IRS suspension of RMD’s.

Financial Details:

  • Taxable brokerage/checking account = $250,000
  • Traditional IRA = $800,000
  • Performance of both accounts = 8%/year
  • Combined pension/social security = $85,750

As illustrated below, today’s discount tax rates may present an opportune time to convert funds from your traditional IRA to a Roth IRA. The reasoning behind this conversion is simple: taxation today is lower than it will be in the future. Converting to a Roth IRA means paying taxes upfront instead of at the time of withdrawal.


Excel file that highlights long-term savings of a Roth conversion

E-Money, a professional grade/cloud-based retirement calculator, was used to aggregate all data in the above scenario. This is a hypothetical example and is not representative of any specific situation. Your results will vary. The hypothetical rates of return used do not reflect the deduction of fees and charges inherent to investing.

Wondering how much you could save? Speak with an advisor at Buckhead Wealth Management, today!


This article is created by Taylor Winn and is provided for informational and entertainment purposes only. The information in the Blog constitutes opinions and it should not be regarded as a description of services provided by Buckhead Wealth Management.

The opinions expressed in the Blog are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security or investment product. It is only intended to provide education about the financial industry. The views reflected in the commentary are subject to change at any time without notice.

A Roth IRA offers tax deferral on any earnings in the account. Qualified withdrawals of earnings from the account are tax-free. Withdrawals of earnings prior to age 59 1/2 or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Limitations and restrictions may apply.

Traditional IRA account owners have considerations to make before performing a Roth IRA conversion. These primarily include income tax consequences on the converted amount in the year of conversion, withdrawal limitations from a Roth IRA, and income limitations for future contributions to a Roth IRA. In addition, if you are required to take a required minimum distribution (RMD) in the year you convert, you must do so before converting to a Roth IRA.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

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