During this world pandemic, we have all faced new challenges and may have taken a pay cut or lost a source of income. For some this is viewed as being negative, however there may be a positive light for having lower income this year.
Have you thought about your retirement accounts lately and the possibility of being able to roll or transfer some or all your traditional IRA into a Roth? By having lower income this year, you may be in a lower tax bracket. When you do a Roth IRA conversion, you pay tax on the amount you convert. Since you are in a lower tax bracket this year, it may be a good year to do it to save some of that tax.
The main advantages of converting to a Roth is that it grows tax free, and you do not have to pay income tax on the money you withdraw in retirement. The reason some taxpayers are unable to contribute to a Roth is because of the income limits set by the IRS, meaning, if your income is over a certain threshold, you cannot contribute. These thresholds are less than $196,000, with a reduced contribution amount between $196,000 to $205,999 and completely phased out over $206,000 for married filing jointly. For single or household filing status’ is less than $124,000, with a reduced contribution amount between $124,000 and $138,999 and completely phased out over $139,000. So, a Roth conversion may be possible for you even if you are over these limits.
Another positive aspect is Roth’s are not subject to required minimum distributions after the age of 72.
Two things to be cautious about is the larger tax bill owed on the money transferred in the current year and when you withdraw the money to make a conversion to a Roth you only have 60 days to put back the money or you will have a 10% extra penalty for an early distribution.
Overall, consider this adjustment as setting yourself up for the future by having money to withdraw at retirement without paying any tax on the money.
Meghan Metzger, MSA