When it comes to the Roth IRA - convert or not to convert
Amit Chandel CPA, CTS, CTP, CExP, CTRS, LLM(Tax) Author
Investor, Author, Tax & Exit Strategist, IRS Representation Expert: Aiming to help you keep & protect your hard earned money in a tax advantaged environment and achieve ideal business continuity & transition
Depending on your circumstances, a tax-free Roth Individual Retirement Account (IRA) may be worth considering. Anyone, regardless of income, can convert to a Roth IRA from a Traditional IRA. The difference between the two is the tax treatment. With a Roth IRA you pay income taxes on the amount you contribute; with a traditional IRA, you pay income taxes when you withdraw your money.
Some Roth IRA basics
Like a traditional IRA, the Roth IRA offers tax-deferred growth1—plus these additional retirement benefits:
- Qualified tax-free distributions
- The ability for individuals with earned income to make their own and spousal contributions past age 70 ?
- No required minimum distributions (RMDs) for account holders, and generally for spousal beneficiaries
- Generally tax-free RMDs for a non-spouse beneficiary that can be stretched over his or her lifetime. The stretch IRA feature can significantly increase the amount heirs receive
Things to consider
Contributions
- There are income limits for annual Roth contributions (for 2020 these are $196,000 to $206,000 for married couples filing jointly and $124,000 to $139,000 for singles and heads of household)
Taxes
- You will have to pay income tax on the taxable portion of the assets you convert to a Roth IRA, but you will not have to pay the 10% early distribution penalty
- Paying the taxes due on a Roth IRA conversion from money you have outside of your IRA, and not from your
- IRA assets will keep more money in your Roth IRA
- The potential benefits of a Roth IRA relate to your income tax bracket in retirement. If you expect that bracket to be lower, converting to a Roth IRA may not be a better option
- If you expect to be in a higher bracket, converting to a Roth IRA now may help reduce your tax burden later
Effects of The Care Act pursuant to COVID-19
The 10% penalty won’t apply to a “Coronavirus-related distribution” of up to $100,000 made in 2020 made to an individual:
- Who is diagnosed with SARS-CoV-2 or COVID-19 by a test approved by the CDC
- Whose spouse or dependent is diagnosed with the virus or disease
- Who experiences adverse financial consequences as a result of being quarantined, furloughed or laid off work or having hours reduced due to COVID-19, being unable to work because of lack of child care, or closing one’s own business.
The administrator may rely on the employee’s certification that the employee satisfies the above conditions.
The distribution is still generally subject to income tax, however. But the income is spread over 3 years starting in 2020, unless the taxpayer elects otherwise.
An individual who receives a coronavirus-related distribution may repay the distribution within 3 yearsand avoid paying tax on the distribution
Temporarily increases to $100,000 the maximum amount that an individual can borrow from his or her plan account balance, starting on the date the CARES Act is enacted and ending 180 days later. It would also allow qualified individuals to borrow up to the lesser of $10,000 or 100% of their account balance, rather than 50% of their account balance under current rules. It appears that plans may, but are not required to, incorporate these limit increases.
The due date for repayment of an existing loan that came due between the enactment of the CARES Act and December 31, 2020 is pushed back one year.
Plans are allowed to suspend making required minimum distributions in 2020. This suspension would also apply to participants who turned age 70-1/2 in 2019 and had not yet received their 2019 distribution.
If you want to learn how it effects your particular circumstances, contact Crystal Wampler and Amit Chandel at 562-281-1040.
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4 年Another thing I ran into yesterday: if you are getting a premium tax credit, a Roth conversation may likely cost you the loss of the subsidy for that year which in many cases can be substantial.