What You Need to Know
- The proposed rules to raise the RMD age will provide more time to build assets in a Roth IRA via contributions, rollovers or Roth conversions.
- Roth IRAs are a key estate planning tool under the Secure Act.
- Roth conversions make sense now, while tax rates are relatively low.
Meanwhile, as President Joe Biden has proposed tax increases, it makes sense to take advantage of Roth conversions and other strategies now, while tax rates are historically low, and the original Secure Act of 2019 made Roth IRAs particularly valuable for estate planning.
Here are some of the reasons Roth IRAs make sense for 2021 and likely beyond.
Roth Conversions and Low Tax Rates
Though tax rates for some of your clients may increase under the Biden tax proposals, rates for 2021 are currently at historically low levels under the Tax Cuts and Jobs Act passed at the end of 2017. This makes Roth IRA conversions attractive for many of your clients. They will pay less in taxes on the conversion of the same amount than they would have prior to the 2017 tax overhaul.
It can make sense to do a conversion in an amount that will let your client “fill up” their current federal tax bracket. In other words, work with them to determine how much they can convert in order to not bump any income up to the next bracket.
Reduce Future RMDs
Money in a Roth IRA is not subject to RMDs. Money contributed to a Roth IRA directly, as well as money contributed to a Roth 401(k) and later rolled over to a Roth IRA, can be allowed to grow beyond age 72 when RMDs are currently required to commence.
Roth conversions and the use of a backdoor Roth are also ways to get money into a Roth IRA and eliminate future RMDs on this money. You will want to weigh the future benefits of reduced RMDs against any current taxes due on the Roth conversion or the backdoor Roth.
For clients who don’t need the money and who prefer not to pay the taxes on RMDs, Roth IRAs provide this flexibility. Additionally, not having to take RMDs on this money allows the Roth account to continue to grow tax-free, allowing this money to be passed on to a spouse or other beneficiaries upon your client’s death.