The Secure Act and the growing popularity of Roth conversions
By Joseph Graziano, CFP®.
the SECURE Law is a significant shift in the retirement landscape. One of the areas he particularly hit is Roth IRAs. So what does this mean for you and your customers? And, how can you better navigate the changes given the proposed tax law changes? We’ll take a look.
Has the SECURE Act had an impact on Roth IRAs?
Yes. Many financial planners and accountants are used to stretch ira. An extended IRA did several things:
- Helped house income from legacy IRAs and Roth IRAs
- Leveraged tax deferral and tax-exempt growth
A major change brought about by the SECURE Act was the elimination of the expandable IRA.
Will Roth IRA conversions disappear?
No one can say for sure what will happen. A lot can change by 2023. What can happen, and we have to prepare for it now, is that in 2023, it will be forbidden to convert after-tax money. At this time, disguised Roth IRA contributions are still permitted.
As a general rule, it is in the investor’s interest to make these disguised contributions while they still can. The maximum after-tax amount that can be paid into these accounts in 2022 is $40,500.
Why is now a popular time to do a Roth conversion?
Tax laws change and congressional action has traditionally been slow. If no action is taken, taxes will rise in 2026. What does this mean for retirement accounts?
- Roth IRA conversions will always exist
- Transferring from a traditional IRA will likely cost more
Since no one wants to pay more taxes than necessary, 2022 is the year to consider converting to a Roth IRA without incurring massive tax repercussions at the same time.
Who is a good candidate for Roth conversions?
If your client is considering a Roth conversion, they may be a good candidate for the process if they meet the following criteria:
- Anyone who is afraid of moving into a higher tax bracket when they retire. You might be wondering how could this have happened? Well, it could happen because of the requirements the IRS places on someone when they turn 72. The IRS requires minimum distributions at age 72. These withdrawals, when added to your Social Security, pension, and any other income you may have, could push you into a higher tax bracket.
- Retirees aged 60 to 72 who rely heavily on Social Security to pay their bills. The threshold of 72 here is very important because you want to convert to Roth before the required minimum distributions come into effect. The IRS does not allow you to convert required minimum distributions into Roths.
- Investors who are trying to leave a legacy to their heirs and who wish to minimize their tax burden.
For many people, converting to a Roth account makes sense. However, there are a few exceptions to the rule where a conversion may not make sense.
Who is a bad candidate for Roth conversions?
We know who is a good candidate for a Roth conversion, but who is a bad candidate? A few times when converting to Roth doesn’t make sense is when:
- A person’s income is already tax exempt
- Individuals in their peak earning years with high earnings
- Converting a Traditional IRA to a Roth IRA May Increase Medicare Part B Premiums
Sitting down with clients and running scenarios on their retirement accounts can provide great insight into the pros and cons of converting to a Roth IRA. Although many investors find conversions beneficial, they are certainly not ideal in all situations.
Additional changes to the SECURE Act
The SECURE law introduces many changes that are important for retirees or potential retirees, including:
- Required Minimum Distributions (RMD) starting at 72 instead of 70 ½
- Non-spouses inheriting IRAs must take required minimum distributions that empty the account in 10 years
- 401(k) plans can now offer annuities
Confusion over the 10-year rule has swirled since the law was passed. Initially, it was thought that the new rule would follow the old 5-year rule. For example, if non-spouse beneficiaries fail to take RMD for whatever reason, a massive 50% penalty is imposed on the missed distribution. Unfortunately, it’s up to the recipient to do all those calculations and make sure they zero out the account.
However, the IRS has since clarified that recipients do not need to take RMDs. Instead, the account must be emptied within the 10 year period.
Why is this important?
Money in the account can continue to grow tax-free during this period before being withdrawn.
Mergers around Roth IRAs are gaining popularity in 2022 due to changes to the SECURE Act. If investors want to reduce their tax burden and maximize their misappropriated contributions, there’s no better time than before the time is up.
Joseph Graziano, CFP® is Vice President and Wealth Management Partner at FFP Wealth Management. Through FFP, he and his team help manage over $2.4 billion in assets. FFP Wealth Management has been serving the unique needs of the accounting community for over 28 years and was born out of an urgent need for accountants and financial planners to join forces to provide top-notch services to their clients.