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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  • 2017: Recharacterization option for Roth IRA conversions repealed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

  1. 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  • TCJA repealed recharacterization option — analysis of conversion more critical since the conversion cannot be reversed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

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