Page 45 - Investment Advisor - Jan/Feb 2021

Conclusions

RETIREMENT PLANNING
By Roger Wohlner

Once a Roth IRA conversion is com-
pleted, distributions from the account
are tax-free as long as certain require-
ments are met.

ROTH IRA CONVERSIONS, RMDs
AND TAXES
Notwithstanding the required minimum
distribution waiver in effect for 2020,
any RMDs for the year must be taken
first, and the amount cannot be con-
verted to a Roth IRA.
Also, any gains on the investments in
the account, regardless of whether the
contributions were made on a pretax or
Roth IRA Conversions: What after-tax basis, are subject to taxes in a
Roth conversion.
Advisors Need to Know client has sufficient cash outside of the
It’s important to be sure that your

Here’s how this retirement planning tactic traditional IRA to cover the taxes on
the Roth conversion. If they need to tap
interacts with RMDs and taxes, as well as some their traditional IRA to cover the tax
bill, these withdrawals will be subject to
strategies to use. taxes and potentially to a 10% penalty if
the client is younger than 59 ½.
uch has been written about the account and converts that money to a
benefits of converting retire- Roth IRA. The money converted to a Roth HOW IS A ROTH IRA
Mment assets in a traditional IRA is taxable as ordinary income in the CONVERSION BENEFICIAL?
IRA to a Roth IRA. During 2020, Roth con- year the conversion is made. The excep- Roth IRAs are not subject to RMDs. For
versions received a lot of favorable press tion is the value of any after-tax contribu- clients who don’t need the RMD income
with tax rates being low and the stock tions made to the traditional IRA that are in retirement, this can result in tax sav-
market being depressed for part of 2020. part of the amount converted. ings each year. Additionally, this allows
This is a retirement savings strategy Another possible type of a Roth IRA the value of the account to remain intact
that might be beneficial for some of your conversion might occur if your client and potentially continue to grow over
clients, but it should be looked at on a is leaving their employer. A tradition- time. A Roth IRA also can be a power-
case-by-case basis to determine if it is a al 401(k) account can be rolled over ful estate planning vehicle for leaving
kryzhov/Shutterstock WHAT IS A ROTH IRA CONVERSION? rules described above will still apply. diversification in retirement and a Roth
money to a spouse or other heirs.
and converted to a Roth IRA. The tax
good fit for a particular client.
It also can provide your client with tax
Depending upon the rules of both the
IRA conversion can act as a hedge against
client’s 401(k) plan and those of the IRA
In a Roth IRA conversion, the account
future tax rate hikes. Having retirement
holder takes some or all of the balance
custodian, an interim transfer to a tradi-
in their traditional individual retirement
tional IRA may be required.
savings in both Roth and traditional
JANUARY/FEBRUARY 2021 INVESTMENT ADVISOR 43