Tax Reform and Roth IRA Conversions – Despair for Some, Opportunities for Others

Tax Reform and Roth IRA Conversions – Despair for Some, Opportunities for Others

Robert Bloink and William H. Byrnes, say that for clients interested in Roth IRA conversions, the tax reform of 2017 was a disappointment.

Under the new regime, people can no longer recharacterize their Roth conversions – a useful option in the pre-reform environment. Tax reform was widely applauded by most customers, but this provision really stuck in the craw of the affected customers.

These disgruntled taxpayers are missing something, our authors say: a clear opportunity to conduct Roth IRA conversions and limit the related tax liability. The current tax rate framework and stock market conditions suggest that Roth conversions make good sense for a wide audience of clients – even though the conversion can no longer be undone. It can even be done, our authors say, without any danger of climbing into a higher tax bracket.

Any amounts converted to a Roth IRA must now be counted as part of ordinary income for the relevant year. Once that hurdle is passed, though, any growth in Roth funds is tax-free. Over time, our authors counsel, the account holder can enjoy a considerable increase in the value of these holdings.

The authors say that Roth conversions work best for people who expect to incur higher tax rates later in life or who think their retirement accounts will grow faster than currently at some time in the future.

Because ordinary income tax rates have been reduced – albeit temporarily – by the tax reform, now is a good time for many clients to do a Roth conversion. Income tax brackets are wider than previously and the tax rate itself has been reduced. This ‘bonus period’ will last until 2025, leaving a fairly wide window for interested taxpayers to exploit.

For more information, please read:
Tax Reform Ruined Roth IRA Conversions, but Hope Exists | ThinkAdvisor

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