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Down Markets? Maximizing Your Roth May Be a Good Move.


The golden rule for Roth IRAs – the time to contribute (or convert) is when markets are low.

When the market is down, you have opportunity to pay less tax on a Roth conversion. Also, Roth conversions and contributions are more advantageous when you consider the higher potential for appreciation following a market decline. In general, it makes sense to consider assets with the highest potential for appreciation when you use a Roth conversion. This allows you to pay tax on the assets when they are cheaper and take distributions tax-free after they have appreciated significantly.

Roth IRA Basics:

Growth and distributions in retirement are tax-free for qualified distributions.

Required Minimum Distributions (RMDs) do not apply to Roth IRAs but are still subject to the new SECURE ACT law mandating distributions to non-spouse heirs of inherited IRAs over ten years, with certain exceptions.

Roth Funding Options:

Contributory Roth IRA – If you have earned income (only one spouse needs earned income) you can contribute $6,000 each or $7,000 if you are 50 or older. These are subject to Modified Adjusted Gross Income threshold limits ($196,000 for Married filing joint or $124,000 for single taxpayers in 2020).

Roth Conversions – By converting, you pay taxes on the fair market value of the taxable portion of the IRA. So, if you have an IRA invested in XYZ stock, which is down 30% and convert to a Roth, you pay taxes on the fair value. If it recovers, you will have made the gain tax-free. One should consider their current marginal tax rate vs. expected rates in their retirement years. The illustration below shows that Roth conversions become especially compelling when the conversion can be made at low or no tax rate:

Back-Door Roth -This option is for those with income above the thresholds and who do not have any other taxable IRA accounts. You can contribute to a nondeductible IRA and immediately convert to a Roth, as another way to keep maxing out your Roth IRA on an annual basis.

Roth 401(k) Plans – Many employers offer these plans which allow you to contribute $19,500, or $26,000 if you are 50 or older (Mega-Roth allow for additional contributions subject to certain rules), on an after-tax basis. These are subject to RMDs.

Whether any of these options are right for you will depend on your own unique circumstances, but down markets and potential loss years are bringing Roth conversions back as a compelling long-term wealth building and tax minimization strategy. Contact your Berntson Porter representative so that we can work with your wealth manager to determine the best strategy for your financial picture. We are here to help!

Additionally, Berntson Porter is here to help you navigate these unprecedented times. Visit our online Resource Center for up-to-date information about COVID-19 legislation that impacts you and your business.


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