Eliminating the Roth Conversion?

In the latest news from Washington, Democrats have revised President Biden’s proposed tax increases and included one major change. According to the revised plan, any individual making $400,000 per year or married household making $450,000 per year, will no longer be eligible for a Roth conversion. The plan also states that Roth conversions will be shut off to everyone regardless of income level, starting in 2032. While this bill still must be approved in the House, Senate, and signed by President Biden, putting an income limitation on the Roth conversion would be a large blow to high income earners saving for retirement.

To illustrate this, if an unmarried individual making $400,000 were to convert $20,000 from their traditional to Roth IRA, they would pay a 35% tax on this money, or $7,000. However, all growth and eventual proceeds from this transfer will be completely tax free. Assuming a 7% yearly rate of return and a 20-year time horizon, that $20,000 would turn into more than $77,000 of tax-free money. That’s $57,000 of non-taxable dollars that you paid $7,000 to convert and will never pay tax on! Now imagine what that number would be if this individual converted $20,000 every year!

By eliminating the ability of higher income earners to convert their pre-tax assets to tax-free, it severely limits their options of adding tax-free assets to their portfolio. Those who currently make over $400,000 or $450,000 should seriously consider utilizing a Roth conversion this year while it is still available. If you would like help assessing if a Roth conversion is right for you or makes sense for your personal situation, reach out to us today!

Carol Dixon, CFP® & Kevin DeRosa, CRPC®

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