“IRA Updates for 2020” Blog Series Part 3



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Last but Certainly Not Least: How to Use IRAs to Foster Financial Success!

We are picking up from where we left off on our IRA Updates for 2020 Blog Series. In our final installment, we’d like to suggest some important IRA strategies to consider this year when devising a successful wealth management plan.  As a reminder, in light of COVID 19, U.S. Treasury Secretary Steven Mnuchin extended the 2019 tax filing date to July 15th, as well as the deadline for making a 2019 contribution to an individual retirement account or Roth IRA. Normally there is no extension for making a prior year IRA contribution beyond the April 15th filing date for that year’s tax return, even if the IRA owner files for an extension.  We hope this final blog post, covering recent developments and ongoing strategies for making the most of your tax-deferred savings, is helpful leading up to July 15th.

IRA strategies

Backdoor Roth Contributions

As we mentioned in our previous post, Roth IRA contributions are subject to income limitations.  Direct contributions are not allowed for married taxpayers earning more than $206,000 or for single taxpayers with income in excess of $139,000.  There is, however, a way around this income restriction and it’s known as a “backdoor Roth contribution.”  It is a fairly simple work around and we describe the strategy more fully in our recent blog post which you can access here

I. Converting a Traditional IRA to a Roth IRA

This technique allows taxpayers to transfer some or all of the money from tax-deferred traditional IRA accounts into tax-free Roth IRA accounts.  The benefit of this conversion is that the Roth balances grow tax-free and there are no required minimum distributions (except for inherited IRAs). The downside to this strategy is that income tax must be paid on any amounts converted.  As such, income tax consequences are a critically important consideration.

For taxpayers with large IRA balances, and particularly those with substantial non-IRA assets, the conversion decision should be carefully considered. Despite the requirement that taxes must be paid on the converted account, the tax-free nature of the growth and income from a Roth account may be very compelling from a wealth transfer perspective. 

The decision to convert also greatly depends upon each individual taxpayer’s unique circumstances, both from an income tax standpoint and more importantly from an overall financial standpoint. Be sure to note that partial conversions are allowed. Ultimately, you must make sure that the long-term benefits of conversion outweigh the substantial upfront tax cost of converting a traditional IRA to a Roth IRA. 

As a general rule of thumb, you should consider a conversion if:  

  1. You do not expect to ever need the money in your IRA for your personal living expenses. If it is likely that the IRA will pass to your heirs, you should consider conversion. The power of the Roth is in the long term tax-free growth of capital and income, so the less likely you are to need the money, the more likely it makes sense to convert for the benefit of your heirs, who will also receive their distributions tax free. 


    You have sufficient non-IRA assets that you can use to pay the income taxes on the conversion. 
  2. You are experiencing an unusually low income tax year and can convert IRA assets to a Roth when you have very favorable (low) tax rates relative to your expected future earnings.  For example, we have utilized this technique when a client suffered a large business loss and had little other income for the year.  They were able to make a substantial conversion at minimal tax cost, allowing future growth and income to be tax-free. 

We regularly review potential Roth conversions for clients during their early retirement years.  Their income may be lower before they begin taking social security and receiving their required IRA distributions.  For an example of how this Roth conversion strategy has worked for one of our clients, please see this post and related article from the Los Angeles Times. 

II. Consider Qualified Charitable Distributions from your IRA

If you’re over 70 ½, you are allowed to make charitable contributions from your IRA account.  For many taxpayers, the recent Tax Cuts and Jobs Act affected the deductibility of direct charitable contributions.  This is because the new standard deductions are much higher and fewer taxpayers benefit from itemizing their deductions.  Using your IRA allows pre-tax money to be contributed to charity and, as an added benefit for those taking RMDs, it reduces the amount of the RMD resulting in lower taxable income from the IRA.  See here for a more thorough discussion. 

Finally, these strategic opportunities for IRA holders may be helpful for both income tax and estate planning reasons, but they must be considered in the context of a comprehensive review and understanding of each taxpayer’s unique financial position.

Stay tuned!  If you’d like to make sure you receive the final installment of our IRA blog series, please sign up on this page to join our email notification list.  As always, if you’d like to discuss this information in further detail and how it might affect you, please feel free to reach out to the Horizon Wealth Advisors team. We are always happy to help!

Horizon Wealth Advisors is a Houston based fee-only wealth management firm. Horizon is a fiduciary advisor. We specialize in helping successful individuals and families understand, organize, and manage their often complex financial situations. Horizon offers integrated financial planning and investment management services.

Larry Maddox, CFP®, CPA
Larry founded Horizon Advisors, LLC in Houston, Texas in 1999 with fellow business partner Joe Thomson. He collaborates with our wealth management team and other external advisors to provide comprehensive wealth management services.

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