There are a few strategies that you can take and implement prior to the end of the year to increase your chances of a better financial future. Having a relationship with an accountant and a knowledgeable tax attorney can help you maximize all of these opportunities. One common thing to consider at the end of a calendar year is a Roth conversion. When this happens you would pay taxes on the distribution from your IRA to an ordinary income tax rate.
However, once the money is inside the Roth IRA, it goes tax free and any distributions from that account are tax free as well. It is a good time to consider the Roth IRA conversion in 2020 because income tax are relatively low. At the yearend 2025, lower income rates passed in 2017 are scheduled to expire and pandemic relief measures could push this time table even sooner. In the event that the value of your IRA is lower than its amount before the pandemic, the tax obligation on converting this would also be lower than if you have previously converted it.
If you’ve had economic challenges in 2020 pushing your income lower, then the tax rate could be lower as well. There are three primary ways approved by the IRS for you to convert your traditional to a Roth IRA. These include:
- The same trustee transfer in which your Roth IRAs and traditional IRAs are managed through the same financial institution and you need to inform the trustee to transfer the amount from the traditional to the Roth.
- Trustee to trustee transfer in which the financial institution holding the traditional IRA assets is instructed to transfer an amount directly to your Roth IRA trustee at a separate financial institution.
- Roll over. This occurs when you take a distribution from a traditional IRA and contribute it to a Roth IRA no later than 60 days after the distribution.
Make sure you understand all of the tax implications for doing this by scheduling a consultation with a professional. A Roth IRA conversion might be a good tool for you, but only when you understand the bigger role in your planning strategy.