Is 2021 a Good Year for a Roth Conversion?

The Made in America Tax Plan proposed by President Biden, could potentially usher in higher income tax rates. This proposed legislation by the Biden Administration would increase the Federal tax brackets across the board, including an increase in the highest tax bracket from 37% (current) to 39.6%. Given a potentially higher tax environment beyond 2021, extra household income accumulated this year through economic stimulus payments, and higher tax credits for families with younger children, it would be advantageous to consider converting pre-tax Traditional IRA dollars to post-tax Roth IRA dollars, this year.

A Roth IRA functions differently than a Traditional IRA. Roth contributions are made with income after taxes are paid, so you would not get a current year tax deduction for the contributions made to a Roth IRA, however, future withdrawals of principal and earnings from a Roth IRA should be tax free. Roth IRAs are also not subject to required minimum distributions, and you can continue to contribute to a Roth IRA beyond age 72 if you continue to work. Roth IRAs can provide a tax-free diversifying option of which you can pull from, for income, while in retirement.

Generally, a good window to conduct Roth conversions is the time between your retirement, when you begin collecting Social Security, and when required minimum distributions begin at age 72. However, considering the proposed tax legislation, and the additional provisions already in effect through the American Rescue Plan Act, it is worth investigating a Roth conversion for 2021. Each household’s unique situation will determine whether a conversion would be advantageous or not. We would be happy to talk with you and help determine if this option is the right fit. Contact our office if you are interested in continuing the conversation.

Disclaimer

This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.