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What the New Tax Proposals Mean for Roth Conversions

Sarah Brenner, JD
IRA Analyst

By Sarah
                                                          Brenner, JD

It’s hard to keep up with the news out of Washington these days! We have been getting a ton of questions on how the new tax proposals recently passed by the House Ways and Means Committee would impact Roth conversions. Here is the rundown.

After-Tax Conversions

Congress is looking to slam the door on the so-called “back door Roth IRA” and “mega back door Roth IRA” strategies. The key point to understand here is that these strategies involve conversions of after-tax dollars. For example, currently the back door Roth IRA conversion allows an individual to make a nondeductible after-tax contribution to a traditional IRA and then convert it tax-free to a Roth IRA. This is a way that higher earners can avoid the Roth IRA contribution limits and fund a Roth IRA.


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AARP

TAKE WITHDRAWALS FROM YOUR TRADITIONAL IRA FIRST

By Ed Slott, CPA

Every month, IRA Expert Ed Slott is taking your questions about Individual Retirement Accounts on AARP:

Should I take withdrawals from my traditional IRA first, or my Roth IRA?

Once you reach age 72, there is no choice. You must begin taking required minimum distributions (RMDs) from your traditional IRAs. Roth IRAs are not subject to RMDs during your lifetime. Then, if you need more income, you are generally better off taking from your traditional IRA first and leaving your Roth IRA funds to grow. Roth IRAs grow tax -free, so you want to give them the most time to keep growing. Tax-free money grows the fastest , since it does not get eroded by taxes.


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Mailbag


Q: The account owner, age 65, dies in 2021 and is survived by a 35 year-old spouse (30 years his junior – sole beneficiary of a traditional IRA). What are the rules (options) for the surviving spouse?

Answer

Q: I am 56 years old and have an IRA which I have been taking SEPP/72(t) payments since 2008. I have not yet taken my distribution in 2021. I recently received a finding of disability from SSA which has been assigned an onset date in September 2020. Back pay will only be for Feb-Apr of 2021, so nothing effects prior tax years. Can I suspend/stop my SEPP/72(t)?

Answer

Q: I have a question about clients who have inherited IRAs and need to take an RMD for 2021 but did not take their 2020 RMD because of the RMD waiver. Will they use the life expectancy number they used for 2019 RMD and subtract 1 or subtract 2 from that number to account for the skipped 2020 RMD?

Answer

Q: I have four IRAs. Does the once-per-year IRA rollover rule mean I can only take one distribution per year in total or does it mean I can only take one distribution per year from each of my four IRAs?

Answer

Have a question for America's IRA Experts?
Email your questions to us at mailbag@irahelp.com. Selected questions will be featured every Thursday in the Slott Report.


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HELP YOUR CLIENTS TAKE FINANCIAL CONTROL, AVOID UNNECESSARY TAXES AND COMBAT THE LATEST THREATS TO THEIR RETIREMENT SAVINGS

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With looming tax proposals continuing to evolve and flood the news—your clients have questions! Take advantage of opportunities to help them lock in today’s low taxes before the year ends with up-to-the-minute insights and planning tips from America’s IRA Expert, Ed Slott, CPA.


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Monday, November 15th
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