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Roth IRA Conversions in 2020 and Beyond
Keith Fevurly, Investment Advisor, Integra Financial Inc. • July 10, 2020
The recent pronounced drop in the stock market and waiver of required minimum distributions (RMDs) have proven the wisdom of making a Roth IRA conversion in the year 2020. This is a strategy whereby the account owner of a traditional IRA transfers some or all the money in the traditional IRA to a Roth IRA. The “cost” of accomplishing this transfer is the payment of income taxes due on the contributions and earnings of the traditional IRA at the time of the up-front. Whether to make the conversion primarily comes down to a comparison of the individual’s current marginal income tax rate (at the time of the conversion) and the rate expected to be paid in the future (at the time of retirement). If this rate is expected to be higher in the future than it is currently, the conversion is accomplished with a significant tax savings. For example, the 2017 Tax Cuts and Jobs Act is presently scheduled to expire (“sunset”) in 2025, so rates are likely to be higher in 2026 than currently. Moreover, to make an optimal conversion, the account owner of the traditional IRA should pay any up-front taxes using money other than those funds distributed from the traditional IRA.
Another lesser-known form of IRA conversion is a “back-door Roth IRA” conversion. This is a two-step technique: 1) the individual saver contributes to non-deductible IRA
However, there are other questions that should be answered before accomplishing a Roth IRA conversion, whether in the year 2020 or beyond. Some of these (with accompanying comment) are as follows:
· Will you have sufficient income from non-retirement account sources to support yourself in retirement? If this is the case, you will also be successful in avoiding future lifetime required minimum distributions (RMDs) from a traditional IRA that could force you into a higher marginal income tax bracket.
· Will your assets have enough time and be invested in such a manner where you can recover the up-front money used to pay taxes due on the conversion? The general rule here is that assets need to be held in the Roth IRA at least 10 years to recover the up-front taxes paid, but this can vary greatly based on the taxpayer’s Roth IRA portfolio and the amount of funds converted on which up-front taxes were paid.
· Do you have enough retirement assets so that you will not need to use them all to support your desired retirement lifestyle? If so, this allows you, as the taxpayer, to effectively use the Roth IRA as an estate planning accumulation device to pass assets to heirs income tax-free. There are still post-death RMDs required from a Roth IRA, however, the surviving spouse beneficiary may “stretch” the post-death RMD over his or her lifetime. Effective 1/1/2020, a non-spouse beneficiary of a traditional or Roth IRA must generally distribute the proceeds over a maximum 10-year payout period (the major exception to this rule is a non-spouse beneficiary where the original owner of the IRA died before 2020).
· Do you have income tax deductions that exceed your income in the current year? If you, as the taxpayer, have experienced a year with a great amount of itemized deductions, such as charitable contributions, and correspondingly less taxable income, then you should probably convert. In this respect, note that the Coronovirus Aid, Relief and Economic Security Act (CARES Act) of 2020 allows itemizers to deduct charitable contributions up to 100 percent of their adjusted gross income (AGI) in 2020 only, thus potentially “zeroing out” any income tax liability entirely!
The best time for retirees to make a Roth IRA conversion is before claiming Social Security benefits and taking required minimum distributions (RMDs). For example, if a woman retires at age 62 with $1.25 million in retirement assets ($1.0 million in a traditional IRA and $250,000 in a taxable account) and plans to spend $72,000 per year in retirement, she should, first, decline to take Social Security until age 70. Next, she should withdraw the needed $72,000 living expenses from the taxable account; the balance in this account should support her for approximately 3.5 years. During that time, she should convert enough money from her traditional IRA at her current tax bracket (likely 22 percent given the amount of traditional IRA balance) to fill up that bracket and deposit the money in a Roth IRA. As her Roth IRA account balance grows income-tax free, her traditional IRA balance declines because of the conversion. Subsequently, beginning in 2026 when the expected tax rate is higher, the woman should change her withdrawal strategy, by taking out enough from the traditional IRA to reduce taxes on her Social Security benefit. Why are her Social Security taxes reduced? Because there is at least a 15 percent exclusion (sometimes, a 50 percent exclusion) of the Social Security benefits under current law. The woman can then use the income-tax-free Roth withdrawals to supplement her income without fear of having the income taxed at the higher rate.
Another lesser-known form of IRA conversion is a “back-door Roth IRA” conversion. This is a two-step technique: 1) the individual saver contributes to non-deductible IRA
traditional IRA and 2) converts the traditional IRA to a Roth IRA. Why does the individual saver use the non-deductible form of traditional IRA as an intermediary form? Because, unlike the traditional IRA, if a saver makes above a certain amount of adjusted gross income (AGI), limitations apply restricting the amount of any contribution that may be made to a Roth IRA. In other words, if the saver makes “too much money” in any taxable year, he or she may not make contributions to a Roth IRA. However, these same AGI limitations do not apply to the non-deductible form of traditional IRA. Hence, the saver makes contributions to the Roth IRA through the “backdoor” of the non-deductible traditional IRA and funds the Roth IRA with after-tax traditional IRA contributions
Happy New Year! We hope you had a wonderful holiday season and wish you prosperity, good friends, and good health for 2025 and beyond. We are pleased to report that the broad Morningstar index increased by 24.09% for the year and 2.57% in the fourth quarter. The "growth" segment of the market, particularly companies like Apple, Microsoft, NVIDIA, Amazon, Alphabet, Meta, and Tesla, has been a major contributor to this performance. Together, these seven companies are valued at approximately $17.92 trillion, which represents around 44.80% of the S&P 500. Their performance remains a significant driver of broader market trends. Several key events have recently influenced the financial landscape: The post-election “Trump Rally.” Bitcoin's significant rise, recently reaching around $100,000. Potential tariffs and their uncertain effects. Government debt interest payments surpassing defense spending, ~$1 trillion vs ~800 billion respectively. A notable increase in government employment in 2023, with 709,000 jobs added, a jump from 299,000 in 2022 and 392,000 in 2021 (source: www.bls.gov). The establishment of the Department of Government Efficiency (DOGE). The full impact of these events is still unfolding, but potential risks to market stability include tariffs, government debt, and the new DOGE department. While tariffs could have far-reaching effects, it is important to recognize that the policies discussed during campaigns may not align with actual implementation. Government debt may not pose an immediate concern, but over time, the bond market may react to the growing debt load, leading to necessary spending cuts. Though such measures could be painful in the short term, they may be necessary for long-term economic stability. The potential impact of the Department of Government Efficiency remains unclear. Elon Musk’s restructuring of Twitter (now X), which resulted in the elimination of thousands of jobs, has been seen as an effort to increase efficiency. Historically, the closure of government departments has been rare; the only significant example occurred during the Carter administration, when Alfred Kahn successfully dismantled the Civil Aeronautics Board (CAB), leading to lower airline prices and more travel options. Overall, we expect the companies we monitor and invest in to remain profitable. Despite potential disruptions, 2025 is likely to be another positive year for the market, though some volatility or "jolts" along the way should be anticipated. Enclosed is our annual privacy notice (mailed letters). Additionally, if you would like a copy of our ADV, it is available on our website or can be sent upon request. Lastly, I want to express my gratitude to Kathy, Nick, Keith, and Alison for their excellent work. Please feel free to contact us with any questions or concerns. We remain committed to providing the best financial advice to support your well-being. Sincerely, Willis Ashby, President Integra Financial, Inc. 5105 DTC Parkway, Suite 316 Greenwood Village, CO 80111 303-220-5525 / 303-689-0973 FAX Bureau of Labor Statics, Wall Street Journal, 1 st Trust, Morningstar, Zacks Research, Co-pilot &/or ChatGPT
I hope you had a wonderful summer and are enjoying weather similar to what we have in Colorado. The Morningstar broad index rose by 3.59% this quarter and is up 19.65% for the year. In a long-anticipated shift, value stocks—such as Costco, Comcast, and Home Depot—have outperformed growth stocks like Google and Amazon. The growth sector, which has led the market for so long, is now seeing stretched valuations and limits to growth, making the value side increasingly appealing for investment. As we focus more on value investing, it’s rewarding to maintain a diversified portfolio that includes both value and growth stocks. Reflecting on the past year and beyond, I’ve been reminded that “the market climbs a wall of worry.” It can be challenging to invest when headline news seems discouraging, but I’ve witnessed this pattern often enough to firmly believe that the best strategy is to enter the market and stay invested. Many of you who have been with us for a decade or more can attest to the benefits of this approach. Viewing investments through a long-term lens—thinking in decades rather than years—helps manage the inevitable market fluctuations. I don’t want to come across as overly optimistic, but there are positive signs: inflation is declining, incomes are rising, and personal savings rates are up. Gross Domestic Product (GDP) is also on the rise, with many corporations exceeding their earnings expectations. Historically, during periods of high inflation, like the Carter years, the stock market has proven to be an effective hedge against rising costs. As expenses—wages, goods, and taxes—increase, the value of stocks tends to follow suit, as corporations pass these costs onto consumers while striving to maintain their profit margins. Nick, Keith, Alison, and I are closely monitoring various factors that could impact the market and your portfolios. As always, we’re keeping an eye on the overall economy, particularly monthly employment numbers. Currently, over 60% of new jobs are in government or government-related sectors, which is less favorable than if the majority were in the private sector. The Federal Reserve has recently lowered the Fed Funds Rate by half a percent, a move prompted by falling inflation that appears to be trending toward the target rate of 2%. This reduction has been celebrated on Wall Street, as it lowers the cost of borrowing, benefiting both businesses and the government. Another trend we’re addressing is the stock-to-bond ratio in your portfolios. The stock side has grown much faster than bonds, for example, an initial 50/50 allocation is now closer to 60% stocks and 40% bonds. To rebalance your portfolio, we will sell some stocks and buy bonds to return to the desired ratio that best suits your investment strategy. In closing, I want to emphasize the importance of being vigilant with your online activities. The number of malicious actors attempting to hack personal information is increasing daily, so please take precautions. If you have any questions or if your financial situation changes, don’t hesitate to reach out. Alison, Keith, Nick, Kathy, and I appreciate your trust and are here to support you. Willis Willis Ashby, President Integra Financial, Inc. 5105 DTC Parkway, Suite 316 Greenwood Village, CO 80111 303-220-5525 / 303-689-0973 FAX
Salary-reduction-type retirement plans have, for some time, permitted so-called “hardship distributions” or “hardship withdrawals” prior to a participant’s retirement date. Salary-reduction-type plans include Section 401(k) plans available to for-profit employees, 403(b) plans for not-for-profit employees, and 457(b) plans for State and local government employees. Generally, such distributions are includible in a participant’s income and are subject to an “early distribution 10 percent penalty”, unless an exception applies.
Inheriting Traditional or Roth IRA Proceeds:
Some points to consider: 1) Likely the biggest distribution question that a 401(k) participant asks is: should I rollover the proceeds to an IRA or retain it within the 401(k), assuming the plan sponsor allows that? There is no certain answer to this question, although in the majority of situations, it is preferable to roll the proceeds because of participant control of the account. See Willis, Nick, or Keith to begin the paperwork for a Rollover IRA.
Greetings! We hope this letter finds you well. As you head into the heart of summer, we hope you're ready to make the most of the season. Whether you're planning a relaxing vacation, enjoying outdoor activities, or simply basking in the summer sun, we wish you a season filled with joy and memorable moments. Let's dive into the latest updates from the financial world.
As usual I hope this finds you well. As we welcome spring and having just finished the first quarter, things look good. The broad Morningstar index was up 10.24% through 03-31-24. The large cap companies led the way up 11.08% and the small caps up 5.69%. The S&P 500 experienced 22 “all-time highs” with less than 2% drops in-between. Amazing!
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I hope you had a wonderful 4th of July celebration. We have a reading of the Declaration at our gatherings, it is always amazing to me to hear how many people under 30 saying they didn’t understand what was declared and to whom it was sent. After the declaration we (our founders) wrote our Constitution taking the best from the Magna Carta of 1215 and the English Parliament’s Bill of Rights of 1689. We have a lot of issues in our country but when you look at our beginning, it is amazing!