Converting a Traditional IRA to a Roth IRA

Converting a Traditional IRA to a Roth IRA


Thinking of Converting Your Traditional IRA to a Roth? Now May Be the Time

Anyone who is thinking of converting a traditional IRA to a Roth IRA may want to consider do it this year. Why? Because today’s unique conditions create an opportunity to minimize the tax bite from converting. In fact, many have already taken advantage of this opportunity, with one provider reporting a 67% increase during the first four months of 2020 compared to a year earlier.1

But before you begin to decide whether or not to convert, make sure you are familiar with what’s involved with a Roth conversion.

What’s a Roth Conversion?

When you convert your traditional IRA to a Roth IRA, any deductible contributions you had made, along with any investment earnings, are taxed as ordinary income for the year of the conversion. That means the taxable value of the conversion could push you into higher federal and state tax brackets.

You will be responsible for full payment of all taxes in the year the conversion is made. If you use assets from the traditional IRA to pay those taxes, the tax amounts could be treated as premature withdrawals, so you could be subject to additional taxes and penalties.

Depending upon your personal financial situation, a Roth IRA conversion could potentially provide a tax-adjusted benefit over time, provided you meet the eligibility requirements.

Why Now?

The coronavirus pandemic has created unique conditions that may make a Roth conversion more attractive than usual.

Your taxable income may be lower

If, like millions of Americans, you have been furloughed or laid off, or your sales commissions are down, you will likely report lower taxable income for 2020. This may put you in a lower tax bracket so that monies converted to a Roth would be taxed at a lower rate than would otherwise apply (unless the amount converted pushes you into a higher bracket). For instance, converting a $15,000 IRA when your marginal federal tax rate is 12% saves $1,500 of tax compared to converting at a 22% marginal rate — and that does not include state tax, which might also drop.2

Your business may incur a loss

The pandemic is causing many businesses to close or incur a loss. If you expect to report a business loss on your personal return, you may be able to convert to a Roth at a reduced tax cost. With the Roth conversion creating additional income, you could use the loss generated by the business to offset some or all of that income.

Your IRA balance may be down

To minimize taxes, it’s better to convert assets when they’re low in value. Although U.S. stocks have recovered most of the ground lost in February and March, it’s possible your IRA balance may still be well off its peak, depending on how it is invested.

RMDs are suspended for 2020

As part of the CARES Act, required minimum distributions (RMDs) for traditional IRAs and qualified retirement plans were suspended for this year. Not taking distributions from a traditional IRA might keep or put you in a lower tax bracket by reducing your taxable income, making it even more desirable to convert to a Roth.

Current tax rates are low and could go up

The 2017 Tax Cuts and Jobs Act (TCJA) reduced federal tax rates, cutting the top marginal rate to 37%. That’s relatively low compared with recent history. Given the staggering price tag of the pandemic bailout (so far) and the ballooning budget deficit, it’s reasonable to assume that at some point, tax rates may increase. When this might happen is anyone’s guess, but converting while rates are relatively low is something to consider.

To Convert or Not?

Whether you would be better off leaving your funds in a traditional account or moving all or some of them to a Roth IRA will depend upon your personal circumstances. Generally speaking, Roth IRA conversions are best suited for investors who have significant time until retirement, are high wage earners, think they may be in a higher tax bracket at retirement, or are looking for an estate planning tool to help pass wealth to their heirs.

Whatever your circumstances, keep in mind that IRS rules governing IRAs and conversions are complex. So be sure to consult with a financial or tax professional before deciding.


1Money, Roth IRA Conversions Are Surging. Here’s Why This Retirement Savings Strategy Is So Popular Right Now, June 4, 2020.

2Example is for illustration only. Your results will differ.

Traditional IRA account owners have considerations to make before performing a Roth IRA conversion. These primarily include income tax consequences on the converted amount in the year of conversion, withdrawal limitations from a Roth IRA, and income limitations for future contributions to a Roth IRA. In addition, if you are required to take a required minimum distribution (RMD) in the year your convert, you must do so before converting to a Roth IRA.

 This material was prepared by LPL Financial. This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that they views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change. All performance referenced is historical and is no guarantee of future results.


Year End Tax Planning: TCJA Edition

Year End Tax Planning: TCJA Edition


Year End Tax Planning: TCJA Edition

With the passage of the Tax Cuts and Jobs Act (TCJA) last December, year-end tax planning could impact even more individuals. A lot has already been written about how it has limited two key itemized deductions: mortgage interest and state and local taxes (SALT). There are also many potential benefits. The TCJA expands the standard deduction and availability of the child tax credit, made reforms to itemized deductions and the alternative minimum tax, and lowers marginal tax rates. Given these changes, here are some things to consider going into the end of the year:


  • Is Tax Deferral Still the Way to Go?- Some individual taxpayers will see their effective tax rate go down in 2018. If you are one of those people, you may want to rethink making tax-deferred contributions to your retirement savings. If you are already in a low tax bracket, you may see more of a long-term benefit by contributing after tax money. In addition to a Roth IRA, some employer retirement plans allow for Roth contributions. Withdrawals from the account may be tax free, as long as they are considered qualified. There are some limitations and restrictions. Withdrawals prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. It should also be noted that future tax laws can change at any time and may impact the tax benefits of Roth IRAs.


  • Should You Convert Tax-Deferred to Roth?- In addition to making new retirement contributions with after tax money, you may benefit from converting money you have in a tax-deferred retirement account to a Roth IRA. Keep in mind, that any money that you convert to a Roth IRA is generally subject to income taxation in the year that you do it. But over the long term, the money will continue to grow tax-free and won’t be subject to required minimum distributions (RMD) in retirement. Roth conversions must be done by December 31st. Traditional IRA account owners should consider the tax ramifications, age and income restrictions in regard to executing a conversion from a Traditional IRA to a Roth IRA. 


  • Should You Take Out More Than Your RMD?- For some retirees with a low income or high medical deductions (threshold decreased from 10% of AGI to 7.5% for 2018), it may actually make sense to take more out of retirement accounts than the required minimum distribution. Even if you don’t need the money to cover expenses, the amount taken above the RMD can be converted to a Roth.


  • Bunching Up Your Deductions- With the combination of the standard deduction being doubled and big-ticket deductions, like mortgage interest and SALT, being limited, it is more difficult to meet the threshold for itemizing deductions. With careful planning, you may be able to bunch up deductions like charitable contributions, medical expenses, and unreimbursed employee expenses in one calendar year to get you over the threshold. For example, if you normally make $5,000 in charitable contributions in a calendar year, consider contributing $10,000 to a charity or donor advised fund, and nothing the following year. The donor advised fund will allow you to take the deduction in the year the contribution is made, but offers discretion to give money out over time to the charities of your choosing. While donor advised funds have many advantages, some disadvantages to be aware of include but are not limited to possible account minimums, strict limits on grant allocations, management fees and the potential that future tax laws may change at any time that may impact the tax treatment and benefits of donor advised funds


  • Consider a QCD- If you are already age 70 ½, and making charitable contributions, you may consider a Qualified Charitable Distribution (QCD). A QCD doesn’t give you a charitable deduction but it counts against satisfying your required minimum distribution for the year. Therefore, it is excluded from your taxable income. Like your RMD, the deadline for this distribution is December 31st.


Keep in mind that these suggestions are only intended to be used as general information and are not intended to be tax advice. You should always consult a tax professional before making tax planning decisions and work with a trusted financial advisor to see how the recent tax laws can affect your investment plan.



Securities offered through LPL Financial, Member of FINRA/SIPC and investment advice offered through Stratos Wealth Partners Ltd., a Registered Investment Advisor. Stratos Wealth Partners, Ltd. and Lob Planning Group are separate entities from LPL Financial.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

Stratos Wealth Partners, Lob Planning Group and LPL Financial do not provide legal and/or tax advice or services. Please consult your legal and/or tax advisor regarding your specific situation.