For anyone with a traditional IRA, the option of converting to a Roth IRA is something to consider. Each individual and their circumstances ultimately determine if a conversion is right for them; but some years offer more reasons to convert than others. 2023 is shaping up to be one of those years.
Before I list the reasons why, I recommend that if you have an IRA you begin a relationship with a fiduciary advisor, like myself. RIAs offer unbiased, personalized recommendations regarding important financial planning decisions, such as Roth IRA conversions.
What is a Roth IRA?
A Roth IRA is an individual retirement account designed for after-tax contributions. There are no current-year tax benefits for this type of account, but earnings can grow tax-free. Withdrawals after age 59 ½ may be made tax- and penalty-free.
What exactly is a Roth IRA conversion?
A Roth IRA conversion is the moving of assets from a tax-deferred traditional IRA to a non-deductible Roth IRA.
What are the benefits of a Roth IRA conversion?
Roth IRAs do not mandate required minimum distributions (RMDs), whereas traditional IRAs do. Assets in Roth IRAs grow tax-free for qualified distributions. Roth IRA beneficiaries also receive these assets tax free.
Why 2023 May Be Ideal for a Roth IRA Conversion.
It’s safe to say personal income tax rates are historically low due to the 2017 tax reform bill. The tax cuts written within this bill are not permanent. Because a Roth IRA conversion involves the assets within a Traditional IRA to be fully taxed at current income rates, converting before rates normalize would be advantageous.
Inherited IRA rules have been changed due to the SECURE Act written into law last year. This act requires inherited IRAs left to non-spouse beneficiaries be withdrawn and incur tax liability in less time than in the past. This change, for many, disrupts existing estate planning for individuals concerned with passing IRAs at death. Converting to a Roth IRA for some would avoid these changes.
Because of current economic conditions, individuals may earn less income in 2023, placing them in a lower individual tax bracket. Being in a lower bracket could help with the additional tax liability from a Roth IRA conversion.
New Benefits for a Roth IRA Conversion Unique to 2023
Asset prices in 2023, including those held within IRAs, have decreased in value because of the weaker economy. This decrease in value would lessen the tax bill associated with a Roth IRA conversion. If the economy recovers, this benefit may not be available in following years.
The waiver of required minimum distributions for 2023, as part of the CARES Act, allows for more funds to become available for a Roth IRA conversion. This benefit may not be available in following years.
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The Bottom Line on Roth IRAs
The factors listed above have created a favorable environment for Roth IRA conversions. If a Roth IRA conversion is right for you, 2023 may be your year. If you’re not currently working with an advisor or if you’ve lost contact with your current one, let’s start a conversation. Contact me at [email protected] or by calling (615) 469-7348.
William Bevins is a Registered Investment Advisor with the SEC. Mr Bevins began his Advising career in 1995 and has spent 18 years as a Professional Equities Trader. Today his firm, Cypress Capital located in downtown Franklin Tn, manages $370 million from Individuals, Small and Medium Size Businesses, Pensions, and Charities. Follow on Facebook.