Is Now a Good Time for a Roth IRA Conversion?

Adviser Lora Hoff, CFP, suggests that 2020 may be a great year for a Roth IRA conversion.
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Question: I am wondering if now would be a good year for me to convert my regular IRA into a Roth IRA? I just turned 60.

Answer: “Yes, this may be a great year for a Roth conversion, depending on your situation,” says Lora Hoff, CFP, with IPI Wealth Management.

Anytime you convert regular IRA funds into a Roth you recognize the converted portion as taxable income in that year, she explains. So, if your IRA is (quite likely) down in value from its 2019 ending value, and you have less taxable income from other sources this year, it could be win-win.

Lora Hoff

Lora Hoff

Example: $100,000 of 2019 value may be $85,000 of current value (down about 15%). Convert at a tax bracket of 20% on 85,000 of income = $30,000 of extra tax.

“Once the funds are inside the Roth they can continue to recover along with the market but now are growing fully tax-free,” says Hoff.

As a reminder, here's what the IRS has to say about Roth IRA conversions:

You can convert your traditional IRA to a Roth IRA by:

  • Rollover – You receive a distribution from a traditional IRA and contribute it to a Roth IRA within 60 days after the distribution (the distribution check is payable to you);
  • Trustee-to-trustee transfer – You tell the financial institution holding your traditional IRA assets to transfer an amount directly to the trustee of your Roth IRA at a different financial institution (the distributing trustee may achieve this by issuing you a check payable to the new trustee);
  • Same trustee transfer – If your traditional and Roth IRAs are maintained at the same financial institution, you can tell the trustee to transfer an amount from your traditional IRA to your Roth IRA.

A conversion to a Roth IRA results in taxation of any untaxed amounts in the traditional IRA. The conversion is reported on Form 8606, Nondeductible IRAs. See Publication 590-A, Contributions to Individual Retirement Arrangements (IRAs), for more information.

Read https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-iras-rollovers-and-roth-conversions.

Got questions about Social Security, Medicare, retirement, investments, or money in general? Get answers. Email Robert.Powell@TheStreet.com. Kim McSheridan assisted with this report.