Carlson Capital Management works with many clients each year to implement a Roth IRA conversion strategy in which a portion of their tax deferred accounts (i.e. 401(k), IRA) are converted to a Roth IRA. Generally speaking, the long-term benefits of a conversion strategy are measured by comparing the amount of taxes paid today upon conversion versus the taxes avoided in the future on all of the investment earnings and growth accruing after the conversion. Many will avoid paying the taxes today on a Roth IRA conversion under the belief that they or their heirs will be subject to a lower tax rate in the future. That said, it’s important to note the potential implications of recently-enacted and pending federal legislation on the current versus future tax-rate analysis: Tax Cuts and Jobs Act of 2017 and Setting Every Community Up for Retirement Act of 2019.

  • Tax Cuts and Jobs Act of 2017
    The Tax Cuts and Jobs Act of 2017 (TCJA) has placed current tax rates at historic lows. The 22% and 24% federal tax rate brackets now extend to income levels where many paid federal taxes at rates of as high as 32–35% under prior law. The tax rates under TCJA are set to expire December 31, 2025, at which time tax rates will revert back to prior law. Tax rates could change earlier based on results of the 2020 election, which places even more urgency on finding and utilizing opportunities in 2019 and 2020.
  • Setting Every Community Up for Retirement Act of 2019 (Secure Act)
    The Secure Act was overwhelmingly passed by the House of Representatives in June 2019. The consensus at that time was that the legislation would be fast-tracked to passage in the Senate and signed into law. The bill has since stalled in the Senate, but it is still expected to become law due to its bi-partisan support.

    If it passes, along with increasing the Required Minimum Distribution (RMD) age to 72, the bill will eliminate lifetime distributions for most non-spouse beneficiaries of tax-deferred accounts. Beneficiaries will, instead, be required to distribute the account in full within 10 years—meaning that all deferred income taxes will be paid within that timeframe. The accelerated distribution schedule could push tax rates for heirs to much higher levels than previously planned, depending upon the size of the accounts and the age and financial situation of the beneficiaries. Roth IRA conversions completed now to mitigate these future impacts are worthy of strong consideration if you wish to maximize the amount of after-tax wealth transferred to your heirs.

There’s no question that the team at Carlson Capital Management will be incorporating Roth IRA conversion considerations into many year-end planning conversations. Please reach out with any questions or if you would like to better understand the impact on your situation.

NOTE: The information provided in this article is intended for clients of Carlson Capital Management. We recommend that individuals consult with a professional adviser familiar with their particular situation for advice concerning specific investment, accounting, tax, and legal matters before taking any action.