Roth IRA Conversions are on Sale
Many retirement savers can get an extra-good deal on Roth conversions right now. Here's why.


While we hope for an end to the current coronavirus pandemic, there may be a silver lining for retirement savers during this time of disruption. If you can manage doing a Roth IRA conversion, you’ll likely pay a lot less to do it now.
Why? For a few reasons. Many people will find themselves in lower tax brackets in 2020, either because of the loss of income from a job layoff or, for retirees age 72 or older, because the CARES Act allows them to skip their taxable required minimum distributions from their retirement accounts for 2020. (For more on that, please read A Hidden Benefit of the Coronavirus Stimulus Bill: You Can Wait to Take Your RMD.)
In addition, many of these same people own stocks in their company retirement plans or IRAs that are down in value due to the recent severe market drop.

Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
A Golden Opportunity
This confluence of circumstances creates a golden opportunity to pay less in taxes when converting a pre-tax IRA to a tax-free Roth IRA (or when converting a pre-tax 401(k) to a Roth 401(k), if the company allows it). When the market rebounds, anyone owning stocks in their IRAs will, in effect, be getting their Roth IRA at a bargain price.
For example, let's say you have a pre-tax IRA invested in stock mutual funds that were valued at $30,000 at the market peak in February of this year. And today the value is $24,000. Let’s also assume you are married filing a joint return and have reduced taxable income either through a job layoff and/or because of the suspension of your RMD.
To make it an even sweeter scenario, let’s say that this reduction in your income reduces your tax bracket from 22% to 12% with projected taxable income of $55,000 for 2020. You can convert the $24,000 pre-tax IRA to a Roth IRA and pay tax on $24,000 in a 12% bracket instead of your former 22% bracket.
The end result is that it would cost you $2,880 in taxes to do the Roth conversion instead of the $5,280 it would cost you in the 22% bracket. And if the market rebounds to its pre-crash level your IRA is now worth $30,000 again.
If this happens, the end result will be you get what equates to an extra $6,000 in your Roth IRA without paying any taxes on it. And from there on out, your Roth IRA grows tax-free, there are no capital gains taxes to pay and all your qualified withdrawals will be tax-free as well. That’s a pretty good deal.
Tax Rates Going Higher
The time to make these extra-cheap conversions is limited, however. Longer-term tax rates are likely to be higher than where they are now, making future Roth conversions more expensive if you wait too long. One reason for this is because our current, more favorable tax brackets are scheduled to expire after 2025 and return to 2017 levels, with five of the seven tax brackets going higher.
In addition, our current deficits and the recent $2 trillion-dollar-plus Coronavirus stimulus package will also add to the upward pressure on tax brackets, as the government looks for sources of tax revenue to pay these deficits down.
Return Those RMDs
If you already took your required minimum distribution for 2020, or what you thought was your RMD, and you don’t need the money, you may now wish to return it since they are not required for this year. Then, if it makes sense, the money could be used in a far more tax-efficient way, by converting some or all of it to a Roth IRA.
There are two possible ways to put the RMD back:
- The most certain way is if the RMD distribution took place within the last 60 days and you haven’t already done your one IRA rollover that you’re allowed to do for each 365-day period. In this case you can simply write a check for the RMD amount and put it back into the IRA before the end of the 60-day rollover period.
- If you took the RMD very early in the year and you have gone past your 60-day rollover window there is still another possible approach to put it back. If you can show that you have been impacted by the COVID-19 crisis enough to qualify under the liberal guidelines for the withdrawal of up to $100,000 under the recently passed CARES Act, this would allow you to put up to $100,000 of your RMD back into your IRA.
Lemons or Lemonade?
While it’s everyone’s hope to see the coronavirus come to an end and stocks to go back to their previous highs and beyond, in the meantime a carefully planned Roth conversion this year may be a way to turn lemons into lemonade.
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.

-
Last Call for Fortnite Refunds: Parents Can Still File a Claim
The FTC is sending out $126 million in refunds to families whose kids were charged for unwanted items in Fortnite — and there’s still time to file a claim.
-
Stock Market Today: Stocks Swing as Trump Scraps Canada Trade Talks
Despite a mid-afternoon slip, the S&P 500 and Nasdaq ended the day at new record highs.
-
Why Smart Retirees Are Ditching Traditional Financial Plans
Financial plans based purely on growth, like the 60/40 portfolio, are built for a different era. Today’s retirees need plans based on real-life risks and goals and that feature these four elements.
-
Technology Unleashes the Power of Year-Round Tax-Loss Harvesting
Tech advancements have made it possible to continuously monitor and rebalance portfolios, allowing for harvesting losses throughout the year rather than just once a year.
-
The Fiduciary Firewall: An Expert's Five-Step Guide to Honest Financial Planning
Armed with education and awareness, you can avoid unethical people in the financial industry by seeking fee-only fiduciaries and sharing your knowledge with others.
-
What to Do After Losing Your Spouse: An Expert Guide
Some financial decisions need to be made sooner rather than later. In honor of International Widows' Day, here's what you need to know about gathering documents and contacting government agencies and financial institutions.
-
I'm a Financial Planner: This Is the Key to Successful Retirement Planning
You have to focus on what you can control — the inputs — and not obsess over what you can't control — the output. Here's how to do that.
-
Summer Is Made for Sun, Fun … and Estate Planning Conversations
Now is the time to discuss estate planning with your loved ones to ensure the Great Wealth Transfer is efficient, tax-aware and in line with your legacy goals — not Uncle Sam's.
-
Don't Have an Estate Plan? Six Things That Could Go Very Wrong
Bad things can happen when you're unprepared, such as big-time taxes and family turmoil. Generational planning can help protect the people you love. Here's some expert advice to help you out.
-
A Financial Planner's Tips for Teaching Kids About Wealth Without Creating Entitlement
If your kids are likely to inherit and you're worried about how they'll manage, start talking about money and teaching common-sense habits as soon as you can.