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• 2017: Recharacterization option for Roth IRA conversions repealed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• TCJA repealed recharacterization option — analysis of conversion more critical since the conversion cannot be reversed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

Smarter Planning. Smarter Portfolios. Smarter Fees.

CERTIFIED FINANCIAL PLANNER™