The recent pronounced drop in the stock market and waiver of required minimum distributions (RMDs) have proven the wisdom of making a Roth IRA conversion in the year 2020. This is a strategy whereby the account owner of a traditional IRA transfers some or all the money in the traditional IRA to a Roth IRA. The “cost” of accomplishing this transfer is the payment of income taxes due on the contributions and earnings of the traditional IRA at the time of the up-front. Whether to make the conversion primarily comes down to a comparison of the individual’s current marginal income tax rate (at the time of the conversion) and the rate expected to be paid in the future (at the time of retirement). If this rate is expected to be higher in the future than it is currently, the conversion is accomplished with a significant tax savings. For example, the 2017 Tax Cuts and Jobs Act is presently scheduled to expire (“sunset”) in 2025, so rates are likely to be higher in 2026 than currently. Moreover, to make an optimal conversion, the account owner of the traditional IRA should pay any up-front taxes using money other than those funds distributed from the traditional IRA.

However, there are other questions that should be answered before accomplishing a Roth IRA conversion, whether in the year 2020 or beyond. Some of these (with accompanying comment) are as follows:

Will you have sufficient income from non-retirement account sources to support yourself in retirement? If this is the case, you will also be successful in avoiding future lifetime required minimum distributions (RMDs) from a traditional IRA that could force you into a higher marginal income tax bracket.

Will your assets have enough time and be invested in such a manner where you can recover the up-front money used to pay taxes due on the conversion? The general rule here is that assets need to be held in the Roth IRA at least 10 years to recover the up-front taxes paid, but this can vary greatly based on the taxpayer’s Roth IRA portfolio and the amount of funds converted on which up-front taxes were paid.

· Do you have enough retirement assets so that you will not need to use them all to support your desired retirement lifestyle? If so, this allows you, as the taxpayer, to effectively use the Roth IRA as an estate planning accumulation device to pass assets to heirs income tax-free. There are still post-death RMDs required from a Roth IRA, however, the surviving spouse beneficiary may “stretch” the post-death RMD over his or her lifetime. Effective 1/1/2020, a non-spouse beneficiary of a traditional or Roth IRA must generally distribute the proceeds over a maximum 10-year payout period (the major exception to this rule is a non-spouse beneficiary where the original owner of the IRA died before 2020).

Do you have income tax deductions that exceed your income in the current year? If you, as the taxpayer, have experienced a year with a great amount of itemized deductions, such as charitable contributions, and correspondingly less taxable income, then you should probably convert. In this respect, note that the Coronovirus Aid, Relief and Economic Security Act (CARES Act) of 2020 allows itemizers to deduct charitable contributions up to 100 percent of their adjusted gross income (AGI) in 2020 only, thus potentially “zeroing out” any income tax liability entirely!

The best time for retirees to make a Roth IRA conversion is before claiming Social Security benefits and taking required minimum distributions (RMDs). For example, if a woman retires at age 62 with $1.25 million in retirement assets ($1.0 million in a traditional IRA and $250,000 in a taxable account) and plans to spend $72,000 per year in retirement, she should, first, decline to take Social Security until age 70. Next, she should withdraw the needed $72,000 living expenses from the taxable account; the balance in this account should support her for approximately 3.5 years. During that time, she should convert enough money from her traditional IRA at her current tax bracket (likely 22 percent given the amount of traditional IRA balance) to fill up that bracket and deposit the money in a Roth IRA. As her Roth IRA account balance grows income-tax free, her traditional IRA balance declines because of the conversion. Subsequently, beginning in 2026 when the expected tax rate is higher, the woman should change her withdrawal strategy, by taking out enough from the traditional IRA to reduce taxes on her Social Security benefit. Why are her Social Security taxes reduced? Because there is at least a 15 percent exclusion (sometimes, a 50 percent exclusion) of the Social Security benefits under current law. The woman can then use the income-tax-free Roth withdrawals to supplement her income without fear of having the income taxed at the higher rate.

Another lesser-known form of IRA conversion is a “back-door Roth IRA” conversion. This is a two-step technique: 1) the individual saver contributes to non-deductible IRA

traditional IRA and 2) converts the traditional IRA to a Roth IRA. Why does the individual saver use the non-deductible form of traditional IRA as an intermediary form? Because, unlike the traditional IRA, if a saver makes above a certain amount of adjusted gross income (AGI), limitations apply restricting the amount of any contribution that may be made to a Roth IRA. In other words, if the saver makes “too much money” in any taxable year, he or she may not make contributions to a Roth IRA. However, these same AGI limitations do not apply to the non-deductible form of traditional IRA. Hence, the saver makes contributions to the Roth IRA through the “backdoor” of the non-deductible traditional IRA and funds the Roth IRA with after-tax traditional IRA contributions