The traditional IRA account values may be very low due to the hit the stock market has taken as a result of Covid-19.  You could take advantage of this reduction in your IRA account value and convert your traditional IRA to a Roth.

There are some recent changes in the tax law which could reduce your taxable income for 2020 and therefore allow some room for additional taxable income from a Roth conversion.

  1.  Waiver of required distribution rules. Required minimum distributions that otherwise would have to be made in 2020 from defined contribution plans (such as 401(k) plans) and IRAs are waived. This includes distributions that would have been required by April 1, 2020, due to the account owner’s having turned age 70.5 in 2019.
  2. Charitable deduction liberalizations. The limitation on charitable deductions for individuals that is generally 60% of modified adjusted gross income (the contribution base) doesn’t apply to cash contributions made, generally, to public charities in 2020 (qualifying contributions). Instead, an individual’s qualifying contributions, reduced by other contributions, can be as much as 100% of the contribution base. No connection between the contributions and COVID-19 activities is required.
  3. Deferral of noncorporate taxpayer loss limits.  The CARES Act retroactively turns off the excess active business loss limitation rule of the Tax Cuts and Jobs Act in Code Sec. 461(l) by deferring its effective date to tax years beginning after December 31, 2020 (rather than December 31, 2017). (Under the rule, active net business losses in excess of $250,000 ($500,000 for joint filers) are disallowed by the 2017 Tax Law and were treated as net operating loss carry-forwards in the following tax year.)

One important reason for converting a traditional IRA to a Roth IRA is due to the tax law change under the SECURE Act which no longer allows for a Stretch IRA for inherited IRAs.  If a spouse inherits an IRA, the heir of the IRA must take out the entire balance of the IRA account within ten years after the death of the original account owner.  If your client converts the IRA account to a Roth, when the heir pulls the funds out of the inherited Roth account it will be tax free.

The other reasons to have a Roth account as opposed to a traditional IRA are still true, such as there are no required minimum distributions out of a Roth IRA when the original owner turns 72 (changed from 70.5 under SECURE Act for years after 2019).

If you have any questions, please contact your Somerset advisor at at 317-472-2200 or .