Updated: Jul 21, 2022
Dear Clients and Friends,
I want to begin this weekend’s reading by addressing the very real human impact that this pandemic is having on all of us. Social distancing has been especially tough on me personally. Many are also grappling with economic concerns and/or raising children while isolated from their friends and family. Needless to say, it is a difficult time for all of us. That being said, we would like to make the most of a bad situation and discuss a potential financial opportunity that may be worth consideration given the current landscape: Roth conversions.
There are two key advantages to Roth IRAs that make them desirable options for retirement savers. Unlike a traditional IRA, Roth IRAs do not have Required Minimum Distribution rules that require you to take distributions when you reach a certain age. This means that you can allow your money to grow, tax deferred, for as long as you like. Furthermore, you do not pay income taxes on any distributions (So long as the distribution requirements are met). This even includes any portion of the IRA that represents investment earnings as well. By having money in both traditional and Roth IRAs, you allow yourself the flexibility to minimize taxable income within your retirement income streams. This may come in handy since we do not know whether tax rates will be higher or lower in the future. So, where is the catch?
While traditional IRA contributions are generally tax deductible, Roth contributions and conversions are typically included in taxable income. This is the largest question that investors face when trying to utilize the Roth IRA: Whether to pay taxes now or defer them to retirement. You may see where we are going with this…
As a result of the economic fallout from the pandemic, many are expecting to make less money this year. Thus, they may temporarily find themselves in a lower tax bracket. Furthermore, depressed market levels can create an opportunity to convert a lesser amount of money into a Roth IRA (less money, less taxes) and allow the funds to recover once they are moved over to the Roth account. While some may have been hesitant to pay the taxes associated with a Roth conversion in the past, the combination of depressed account values and lower tax rates could create the ideal scenario in which to make the switch.
Everyone’s situation is unique. If you feel that you may benefit from this opportunity, please reach out and we can determine if this makes sense for you. Please feel free to share this article with any friends or family that you feel may benefit from it.
Please stay healthy and safe and have a lovely weekend
Daniel Levinson, CFP®
Financial Planning Associate
MOR Wealth Management, LLC
1801 Market Street, Suite 2435
Philadelphia, PA 19103
P: 267.930.8303 | c: 856-906-4888 | f: 267.284.4847 |
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