Convert Your Traditional IRA to a Roth? Now May Be a Good Time.

Want to convert a traditional IRA to a Roth? Now might be a good time to consider it. You’ll have to pay income tax on the converted funds for the year of the switch, but once the money is in the Roth IRA, future earnings and distributions that you take from the account are tax-free.

Present and future income tax rates are key in figuring whether a Roth conversion makes sense. If you expect the tax rate that you’ll pay in retirement will be equal to or higher than the rate on conversion, then switching to a Roth IRA can pay off taxwise, provided you don’t have to tap IRA funds to pay the tax bill on the conversion.

If your tax rate in retirement will be lower, tax-free Roth payouts are less advantageous. Income tax rates are low right now, but that might very well change in the future, depending on the state of the economy and who is elected president in November.

Let’s turn to other factors to consider when pondering a Roth conversion: There is no required minimum distribution for owners of Roths. RMDs from traditional IRAs are waived for 2020 under the stimulus law.

Usually, if you do a Roth conversion in a year that you are subject to the RMD rules, you must first take your distribution from your traditional IRA. But not this year.

Converting can pay off if assets in your traditional IRA are depressed in value. Switching to a Roth before the assets rise in value will result in a lower conversion tax.

The additional income from converting can trigger higher Medicare premiums. For example, individuals owe a monthly surcharge for Medicare Parts B and D coverage for this year on top of their regular premiums if their modified adjusted gross income for 2018 exceeded $87,000…$174,000 for married people who filed a joint tax return.

These figures will be somewhat higher in 2020 for figuring 2022 monthly surcharges. Income from converting to a Roth IRA is included when calculating modified AGI, so doing a Roth switch this year could lead to higher monthly surcharges in 2022.

Converting can also subject more of your Social Security benefits to tax.
You don’t need to convert the entire amount to a Roth in one swoop. You can transfer the money in increments over time and space out the tax hit.
The Kiplinger Tax Letter (ISSN 0023-1762)