Filed under: High Net Worth Individuals, Personal Financial Planning

If you have ever been advised or tempted to convert your traditional IRA to a Roth, 2020 may finally be the year to make that move.

There are two factors that could make the conversion more attractive this year: the challenging economic environment, and a 2020 change in tax law that may work in your favor. We’ll cover both below.

Lower Tax Brackets

First, for many high net worth individuals, 2020 will be a challenging year with a much lower taxable income compared to prior and (hopefully) future years.

While this current situation is certainly painful, it does mean that lower IRS income tax brackets could apply for the 2020 tax year. Thus, from a 30,000-foot level, and if all other things in prior years are equal, the degree of increased tax liability to be paid in 2020 from a full or partial Roth conversion may be at a historically low level.

It’s also important to note that the upcoming election may lead to an increase in future tax rates. The results of Nov. 3, 2020 could make it much more expensive for a Roth conversion in future taxable years.

The CARES Act

Now, let’s say that 2020 was unexpectedly a very high taxable year, and that marginal income tax rates and taxable income were at a very high level compared to prior and future taxable years.

Typically, this would lead taxpayers to shy away from considering a current year Roth conversion due to incurring a substantial additional tax burden. However, there may be a workaround for charitably inclined taxpayers who also set aside a certain amount of cash for legacy charitable contribution planning.

The COVID-19 relief package passed in March, commonly referred to as the CARES Act, provides for a one-time ability to offset up to 100% of a taxpayer’s 2020 adjusted income with enhanced cash contributions to certain types of designated charities. Combining a full or partial 2020 Roth conversion with an enhanced gift to charity may provide for both a decreased payment to Uncle Sam and an increased contribution to your favorite charity. A true win-win type of scenario.

More Information

Each taxpayer situation is unique, so if you have any questions regarding the tax consequences of a 2020 Roth conversion, please contact a Clark Nuber professional.

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