6 ROTH STRATEGIES TO HEDGE THE RISK OF HIGHER TAXES
CURRENT TAX ENVIRONMENT
Lower tax rates from the TCJA
Doubling of standard deduction and scale-back of popular deductions means the overwhelming majority of taxpayers claim the standard deduction on their tax return
Alternative minimum tax (AMT) no longer an issue for most taxpayers
Heirs can still benefit from stepped-up cost basis at death on certain inherited assets
Uncertainty on tax rates after 2025 when the TCJA expires — or before?
Fiscal Pressures Drives Need for More Revenue
HOW ROTH ACCOUNTS CAN HEDGE TAX RISK
Tax-free income in retirement
No RMDs for owner or spousal beneficiary (owner)
Roth income not considered for taxation of Social Security benefits, Medicare Part B/D premiums, other tax-related phase-outs
Given the SECURE Act 10-year rule, leaving Roth accounts to heirs may be more tax-efficient
CHANGES IN ROTH ACCOUNTS OVER THE YEARS
1997: Roth IRAs established
2006: Roth 401(k) available to plan sponsors
2008: Direct rollovers from qualified retirement plans to Roth IRA available
2010: Roth IRA conversions available to all taxpayers regardless of income
2010: Roth conversions available within plans
2014: Plan Participants able to transfer after-tax plan assets directly to a Roth IRA
2017: Recharacterization option for Roth IRA conversions repealed
6 ROTH STRATEGIES
DETERMINE YOUR PROJECTED INCOME BEFORE YEAR-END AS BASIS FOR A PARTIAL ROTH IRA CONVERSION
2. WAIT UNTIL YEAR-END APPROACHES TO DO A ROTH IRA CONVERSION
TCJA repealed recharacterization option — analysis of conversion more critical since the conversion cannot be reversed
Better idea of projected income and overall tax situation closer to year-end
Be aware of ”downstream” implication of a conversion — impact on Medicare Part B/D premiums, exposing investment income to 3.8% surtax, §199A QBI deduction for business owners, etc.
3. CONTRIBUTE TO A NON-DEDUCTIBLE IRA AND THEN CONVERT TO A ROTH
2020 income phase-outs for Roth contribution:
Single = $124,000
MFJ = $196,000
Contribute to a non-deductible IRA then subsequently convert
to a Roth IRA – but be aware of the aggregation rule!
4. LEVERAGE AFTER-TAX RETIREMENT PLAN CONTRIBUTIONS TO CREATE A SIZEABLE ROTH POSITION
Some qualified retirement plans allow voluntary, after-tax contributions into the plan above and beyond normal salary deferrals under the 402(g) limit ($19,500 + $6,500 catch-up contribution for those age 50+)
For 2020, the limit for overall contributions into a defined contribution plan (i.e. the 415 limit) is $57,000 (not including catch-up contributions)
In 2014, the Treasury Dept issued guidance (IRS Notice 2014-54), clarifying that after-tax assets held within a qualified retirement plan can be directly transferred to a Roth IRA once a triggering event applies
May allow for de facto, large Roth IRA contributions for those already maxing out their retirement contributions
5. MATCH TAX DEDUCTIONS WITH A ROTH IRA CONVERSION
Lump deductions into a tax year when converting traditional IRA assets to a Roth
For example, if making annual charitable gifts, consider a donor-advised fund to lump charitable contributions in a single tax year
Also may consider a Roth IRA conversion in a tax year when overall income is lower than usual
6. CONSIDER ROTH CONVERSIONS BEFORE REACHING CERTAIN MILESTONES
Smarter Planning. Smarter Portfolios. Smarter Fees.