The SECURE Act, which passed in December 2019, aimed to make retirement savings less complicated for retirees. It kickstarted significant changes to contribution ages and required minimum distributions, and the law also affected inherited IRAs for many people. 

If you’ve saved for retirement and are concerned about your future tax situation and the inheritance you’re leaving to your heirs, the SECURE Act may directly affect your plans. You may want to consider talking to a financial planner about your plans for transferring wealth, as it may be in your best interests to convert part of your traditional IRA into a Roth IRA.

What Are Roth Conversions?

There has always been a benefit to Roth conversions, but after December 2019 those benefits became even more valuable. That’s because, over the course of your retirement, your tax bill often increases because your required minimum distributions in your IRA increase over time. This increases your income levels, which in turn increases your taxes owed. 

On top of that, if you are married and lose a spouse during retirement, you enter the “single” tax bracket and have to pay even more in taxes because of your new tax bracket. 

By managing your tax situation and deciding to do a Roth conversion, you gain more control of your tax situation over the course of your life. Now, due to changes to IRAs founded in the SECURE Act, a Roth conversion may be even more ideal for your situation.

What Is the SECURE Act?

The SECURE Act (Setting Every Community Up for Retirement Act) became law on December 19, 2019. It aims to simplify the rules of IRAs and retirement savings.

The new law raised the required age to begin drawing minimum distributions from tax-deferred accounts from 70.5 to 72. And as long as you’re working and have earned income, you can contribute to a traditional IRA regardless of age. You can read more about the details of the SECURE Act here.

How Has the SECURE Act Affected Beneficiaries?

One thing the SECURE Act has eliminated is the “stretch IRA.” 

Before the SECURE Act, the stretch IRA allowed non-spouse beneficiaries — often children and grandchildren — to take money out of an inherited IRA little by little over their lifetimes. This strategy let beneficiaries grow their account over time, minimizing withdrawals as well as tax impact.

Now, under the SECURE Act, beneficiaries must empty the inherited IRA within 10 years. This is significant because it forces the tax liability to be recognized in 10 years instead of having the flexibility to spread over their lifetime. Often, the beneficiaries are in their peak earning years and at a higher tax bracket, which means the total tax is more than it would have been before the SECURE Act passed.

If you want to minimize future tax bills and still leave behind a significant inheritance for your heirs, consider converting your traditional IRA into a Roth IRA. You can also enjoy tax-free withdrawals while in retirement with a Roth IRA.

How Roth Conversions Work

Converting a traditional IRA into a Roth IRA is called a “Roth conversion.” If your income exceeds the limits set by the IRS, you can still do a Roth conversion.

Transferring from a traditional IRA to a Roth IRA isn’t too complicated. It usually requires two steps:

  1. You pull money out of your IRA and pay taxes on the full amount at your current tax bracket.
  2. You immediately put the money into a Roth IRA where the money grows tax free and can be distributed tax free.

Of course, a financial advisor will be able to help you determine if an entire conversion is right for you, and help you choose the ideal window in which to do it.

Is a Roth Conversion Right for You?

It’s important to note that a Roth conversion is considered a taxable event. The conversion will trigger an income tax bill on the converted funds. If you aren’t able to pay the tax bill, it may not be the right time to do a Roth conversion.

However, once your money is inside the Roth IRA, future withdrawals are tax-free. If you expect to be in a higher tax bracket in retirement, or if you want to avoid required minimum distributions, a Roth IRA may make more sense for your needs.

Learn More About Roth Conversions

If you need more help deciding whether a Roth conversion is right for you, when to do it, or which Roth IRA accounts are best, speak to a financial advisor at Guiding Wealth. We specialize in retirement planning services for individuals, couples, and families.