The Tax Planning Strategy Everyone Should Consider Before Year-End

Our clients tell us one of the primary benefits we provide is a well-designed retirement strategy. One of the most overlooked retirement strategies can occur well before retirement – a Roth IRA conversion. Several years ago Congress changed the tax laws allowing all taxpayers, regardless of income level, to convert traditional IRA funds to a Roth.

What’s the difference in a traditional IRA versus a Roth IRA? In most cases, traditional IRA contributions reduce one’s taxable income, but the distributions are taxed as ordinary income. In addition, traditional IRAs require mandatory distributions once the owner reaches age 70 ½.

Roth IRA contributions don’t reduce taxable income, but the distributions aren’t taxable and there’s no required distribution during the account owner’s lifetime.   

What makes converting to a Roth so appealing? Lower tax rates.

For example, a married couple with taxable income of $158,000 in 2019 is in the 22% tax bracket. The 22% tax bracket for married filing jointly goes to $168,400. We often recommend “filling up” this tax bracket with a partial Roth IRA conversion (in this case, we would convert $10,400 from a traditional IRA to a Roth). The conversion amount is taxed this year at the 22% rate.

By reviewing client tax returns and doing tax projections for clients, we can determine if Roth conversions make sense and what the optimal amount is in a given year.

The window of opportunity for taking advantage of historically low tax rates may soon close. Make sure you review your situation to see if you might benefit from a Roth IRA conversion.