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Plan and Verify Your Tax Benefits: Consider These Roth Strategies

     Financial Progress Blog

These past few years have brought political, economic, social, and medical conflicts in rapid succession. We have also had three legislative acts to promote tax, retirement, and economic stimulus in these years. Coincidence or not, each of these Acts have provided additional incentive to review a number of Roth strategies that may improve tax outcomes.

2020 has been a cataclysmic year on several fronts.  On the pandemic alone, the U.S. has already initiated a stimulus package of $2.2 Trillion through the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) , signed on March 27, 2020.  Efforts are underway now  to increase this aid substantially.  The Fed has also enacted other forms of stimulus such as the lowering of the Fed funds rate and injecting cash into our system with purchases of U.S. government bonds.1  At some point in the future we know we are going to have to atone for these expenditures and lending.  This likely will lead to discussions of cutting spending and/or raising taxes.

In addition to the CARES Act, we have also seen the passage of  two other tax and retirement pieces of legislation.  They are the Tax Cuts and Jobs Act (TCJA signed in December of 2017 and taking effect in 2018), and the Setting Every Community Up for Retirement Enhancement (SECURE Act signed in December 2019 and taking effect in 2020).  These provisions  brought major changes to how we save for retirement and how much we are taxed. This makes the tax focus so critical and the potential consequences to you and your family so timely.

As a source of tax free income, the various versions of the Roth in our retirement plans are getting even more attention.  We will look at some of  the economic effects of recent tax legislation, and review the benefits of expanding the use of the Roth component in your retirement plan.  You may find that the current economic instability and potential for even higher tax rates will make the features of a Roth IRA, Roth 401(k), and Roth 403 (b) even more valuable.  Fortunately, the planning tools we have today can verify if the Roth could be a smart move in your own situation.

Traditional and Roth Basics

In a traditional IRA account, your contributions may receive a deduction, which gives it pre-tax treatment. When retirement distributions are taken after 59 ½, both the earnings and contributions are taxed as ordinary income.  In a Roth IRA, the contributions receive no deduction and so the original principal is after tax. If the account holder is over 59 ½ and there are original Roth  dollars that have aged in the account at least 5 years, than all withdrawals will be treated as tax free income.  

For 2020, one can contribute a maximum of $6,000 to a traditional or Roth IRA, or a combination of the two. If you are 50 or over, you can contribute up to $7,000 with a catch up provision.  There are income thresholds to deduct a traditional IRA if you are an active participant in a workplace retirement plan. You will get a full deduction if you are single with modified adjusted gross income (MAGI) up to $65,000, and up to $104,000 if you are married filing jointly. 

With a Roth IRA account, there are thresholds solely based on income. Currently, you may fully contribute if you are single with a MAGI up to  $124,000, or up to $196,000 if you are married filing jointly.

Roth 401(k) and Roth 403(b) Basics

Both of these types of plans have an elective portion (what the employee contributes), and a possible match (what the employer may contribute).  In a traditional 401(k) or 403 (b), both sides of the contributions are pre-tax. This means all of the future distributions are taxable.  If the employer offers a Roth component, than only the employee portion may be after tax, with future distribution of contributions and earnings tax free. If there is a match by the employer, this will be pre-tax and is taxable as ordinary income at distribution.

Roth 401(k)s and Roth 403)b)s  allow larger contributions to the Roth component. For 2020, the elective deferral if $19,500. If you are 50 or over, there is a catch up provision available of an additional $6,500.


Roth IRAs, including Roth 401(k)s and Roth 401(b)s that may be rolled over to Roth IRAs, are not required to distribute required minimum distributions (RMDs); so there is substantial control over the sources of income shown in retirement.  This could have an impact on timing and the amount of taxation as described in the upcoming strategy section. 

To prepare for having a greater pool of tax free funds, you may consider converting traditional IRAs and retirement plans to the  Roth IRA. A conversion allows one to transfer funds from a traditional source to the Roth IRA without “contribution”  limits.  The downside is that you will be taxed on the pre-tax portions in the year you take it out. The potential benefits are the tax free accumulation benefits going forward.  Conversions can occur at any age, even under 59 ½, without the 10% penalty.  However, there is  greater incentive to execute this in years when you are in a lower tax bracket.

Strategies to Review Now

Changes under the SECURE Act (Effective 1/2020)

RMDs for IRAs are now required to begin at 72 vs 70 ½

  • This might not seem dramatic, but it does give more time to accumulate assets before having to take minimum dollars out.  It is also easier to track this requirement by age.
  • This may also give more time to perform Roth conversions, when you are more likely to be in a lower tax bracket.
  • Remember, Roth IRAs are not required to take RMDs, so you can choose your sources for the retirement income you need. Tax-free distributions from a Roth IRA may help keep you in a lower tax bracket. This may help avoid higher tax rates on capital gains, net investment income, Social Security income, and perhaps avoid or reduce the Medicare surcharge.

No Limit on Age for Contribution to Traditional IRAs

Previously, you were not allowed to contribute to a traditional IRA once you reached 70 ½.  Now, there is no age limit as long as you have earned income to support the contribution.  Roth IRAs never had an age limit as long as there was earned income. 

  • If you are among the growing population to work past your “normal” retirement age, this change will allow you to accumulate even more into your Traditional or Roth IRA. It is not that unusual to see people continuing to fund their retirement plans, while taking a RMD at the same time.

Elimination of the “Stretch” IRA (Lifetime) for most Non-Spouse Beneficiaries and Replaced with a 10 Year Distribution Period Cap

One of the best perks of the IRA was the ability to extend distributions to multiple generations.  Other than a spouse and a few exceptions, distributions to non-spouse beneficiaries have been capped at 10 years. Distributions can be taken in any amount and in any year as long as all distributions are completed by the end of the 10 year.

  • The stretch is still available for spouses over their lifetimes, as well as disabled beneficiaries (IRC Section 72(m)(7)), chronically ill (IRC Section  7702B(c)(2), individuals not more than 10 years younger than the decedent, and minor children of the original retirement account owner until they reach the age of majority.  Depending on the tax status of the beneficiary, the tax free nature of an inherited Roth could be a very valuable benefit.
  • For those who are limited within the 10 year time frame, the Roth IRA could alleviate the tax and timing concern of the distribution.

Changes under the Tax Cuts and Jobs Act (TCJA)  (Effective 2018)

Change in Individual Tax Rates, New Standard Deduction levels replace Personal Exemption, State/Local Property Tax + State Income Tax Deduction Capped at $10,000

First, all of these items are set to be in place from 2018-2025, and then are to return to their pre-2018 positions. Second, some or all of these parameters could be subject to change after the election. Third, the sum total of these changes have different results for people depending upon their income level, property ownership, and even family size.

  • If you had reductions in your overall taxes, this might be an ideal time to consider Roth conversions, and/or Roth contributions. There will be more talk of tax increases given current events, and there is the sunset provisions of TCJA looming.
  • Note:  Recharacterization of Roth Conversions was also repealed under TCJA. This means that conversion decisions are final.
  • If after tax contributions to a 401(k) are allowed in your plan and these funds are then converted, you may have less tax consequence because there is no tax on the after-tax portion and current tax brackets have been reduced.

Changes under the CARES Act (Effective 3/27/20)

Suspension of RMDs in 2020

Many people may have already taken their RMDs this year out of need. If they wanted to return these withdrawals they would have had to return them by 8/31/20. 

  • There may be an advantage to perform a conversion of the RMD amount to a Roth IRA if it has not been taken yet.  Normally, you cannot use your RMD withdrawal to convert to a Roth. It is considered a distribution and taxed.  However, since there is an option to suspend an RMD for this year, it could be an opportunity to get those dollars to a Roth.

The Roth format has been around since 1997, and is one of those exceptional methods of controlling our tax levels.  With our current planning tools, let us test for your potential tax savings. 

1) Federal Reserve, Press Release, March 15, 2020






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