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Secure Act 2.0, Biden Tax Hike Plans Make Roth IRAs a Crucial Tool

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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.

Roth IRAs offer an excellent planning tool for many of your clients. The “Secure Act 2.0” retirement bill, which is widely expected to pass, would open a wider window for Roth IRA planning.

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. 

The Securing a Strong Retirement Act, known as the Secure Act 2.0, would gradually raise the age for RMDs to start to 75 by 2032. The first bump would be effective Jan. 1, 2022, moving the starting age to 73. If passed, this provision would provide extra time for Roth conversions and Roth contributions to help retirees permanently avoid RMDs. 

Tax Diversification 

Roth IRAs provide tax diversification. For clients with a significant amount of their retirement assets in traditional IRA and 401(k) accounts, this tax diversification can be an important planning tool as they head into retirement. The ability to withdraw funds on a tax-free basis from their Roth IRA can help provide tax planning options in the face of an uncertain future regarding tax rates. 

It is not uncommon for retirees to find themselves in a higher tax bracket than they had planned. Between taxes on RMDs, Social Security and pension income, as well as income from full or part-time employment, it all adds up. The tax diversification provided by a Roth IRA can offer some tax relief and some solid planning alternatives for clients in this situation. 

Estate Planning and the Secure Act 

Roth IRAs have long been a viable estate planning alternative due to the fact that no RMDs are required. This feature allows the assets in the account to continue to grow tax-free for the account holder’s beneficiaries.

The tax-free nature of Roth IRAs has taken on another dimension with the inherited IRA rules under the Setting Every Community Up for Retirement Enhancement (Secure) Act. 

One of the key features of the Secure Act was the elimination of the stretch IRA for inherited IRAs for most non-spousal beneficiaries. Instead, these beneficiaries must withdraw the entire amount in an inherited IRA within 10 years of inheriting the account. This feature is known as the 10-year rule

While inherited Roth IRAs are also subject to the 10-year rule, the withdrawals can be made tax-free by account beneficiaries if the original account owner had met the 5-year rule prior to their death. This tax treatment can make Roth IRAs an ideal estate planning tool in situations where your beneficiaries are non-spouses who don’t qualify as eligible designated beneficiaries. 

Summary 

Roth IRAs continue to offer your clients a solid planning alternative for their retirement savings into 2021. Roth accounts can help with retirement tax planning as well as estate planning issues. This may be an option to discuss with your clients.


Roger Wohlner is a financial writer with over 20 years of industry experience as a financial advisor.