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Roth IRAs have attracted retirement savers with the potential for tax-free retirement income since their introduction in 1998. Distributions taken from Roth IRAs are exempt from federal taxes if you a) are at least 59 1/2 years old, b) have owned the Roth IRA for at least five years, and c) follow all other IRS guidelines.²
More recently, events like the global pandemic and changes to IRA rules and federal taxes have made Roth IRAs especially attractive for traditional IRA holders, who could benefit from converting account types now while tax rates are low.
Below are three sound reasons you may want to switch to a Roth IRA this year if you hold a traditional IRA.
With federal tax rates at historic lows thanks to the Tax Cuts and Jobs Act of 2017, it may be a good time to consider converting your traditional IRA to a Roth IRA. Unlike traditional IRAs, which pay taxes at the time of withdrawal, Roth IRAs are taxed at the time of contribution to protect you from getting taxed at a higher amount when it comes time to withdraw in the future.
It’s important to keep in mind that you will have to pay taxes on the converted amount, since no taxes were paid towards the traditional IRA. Current tax rates are scheduled to stay steady through 2025.3 Also, keep in mind that tax rules change from year to year, and future tax changes may affect IRAs.
This reason to convert to a Roth IRA may or may not be relevant to you—it applies only if you have a non-spouse beneficiary listed or wish to list a non-spouse beneficiary.
In 2019, the Setting Every Community Up for Retirement Enhancement (SECURE) Act ruled that a non-spouse beneficiary of an IRA must completely withdraw an inherited IRA balance within 10 years, rather than over the beneficiary’s lifetime. The distribution can be taken as a lump sum or in payments over the 10-year period. There are no set guidelines for withdrawal other than it must be empty in 10 years.
This includes Roth IRAs—the new owner must deplete the inherited IRA in 10 years. However, there may not be any federal income taxes on the amounts withdrawn from a Roth IRA if IRS rules have been respected, making a Roth IRA appealing to those with one or more non-spouse beneficiaries listed.3
Taxable incomes have declined for many households due to recent economic slowdown resulting from the COVID-19 pandemic, putting some traditional IRA owners in lower tax brackets this year. This could be an advantageous time to go Roth.
If you currently hold a traditional IRA and you're considering converting to a Roth IRA, talk to a financial professional about your options—you may benefit from paying taxes on your retirement income now while federal rates are low or if you're currently in a lower bracket. If you have a non-spouse beneficiary listed on your IRA, you may want to switch to save them a potential tax headache in the future. Contact an Alaska USA Financial Planning and Investment Services professional to discuss your options today.
This article is for informational purposes only. It does not replace real-life financial or tax advice. Be sure to consult a tax or financial professional before making any decisions regarding your IRA.
This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.
Representatives are registered, securities sold, advisory services offered through CUNA Brokerage Services, Inc. (CBSI), member FINRA/SIPC, a registered broker/dealer and investment advisor, D/B/A Alaska USA Financial Planning & Investment Services, which is not an affiliate of the credit union. CBSI is under contract with the financial institution to make securities available to members. Not NCUA/NCUSIF/FDIC insured, May Lose Value, No Financial Institution Guarantee. Not a deposit of any financial institution. CUNA Brokerage Services, Inc. is a registered broker/dealer in all fifty States of the United States of America. #FR-3547400.1-0421-0523 Exp. 05/13/2023
1. TheStreet, May 13, 2020
2. NerdWallet, July 31, 2020
3. Bankrate, July 21, 2020
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