june2022 - 32

FEATURE
The Secure Act and the Growing
Popularity of Roth Conversions
THE SECURE ACT is a significant change to the retirement landscape. One of
the areas it especially impacted is Roth IRAs. So, what does this mean for
you and your clients? And, how can you best navigate the changes given
proposed tax law changes? Let's take a look.
DID THE SECURE ACT IMPACT
ROTH IRAS?
Yes. Many financial planners and accountants are
accustomed to the stretch IRA. A stretch IRA did
a few things:
* Helped shelter income from inherited IRAs
and Roth IRAs
* Leveraged tax-deferment and tax-free growth
A major change brought on by the SECURE Act
was the elimination of the stretch IRA.
ARE ROTH IRA CONVERSIONS
GOING AWAY?
No one can say for sure what will happen. A lot can
change between now and 2023. What may happen,
and it's something to prepare for now, is that in
2023 converting after-tax money will be prohibited.
As of right now, backdoor Roth IRA contributions
are still permitted.
Typically, it's in the investor's best interest to
make these backdoor contributions while they still
can. The maximum after-tax dollars that can be
put into these accounts in 2022 is $40,500.
WHY IS NOW A POPULAR TIME TO
MAKE A ROTH CONVERSION?
Tax laws change, and congressional action is
traditionally slow. If no action is taken, taxes
will rise in 2026. What does this mean for retirement
accounts?
* Roth IRA conversions will still exist
* Transferring from a traditional IRA is likely
to cost more
Since no one wants to pay more taxes than
necessary, 2022 is the year to consider converting
to a Roth IRA without incurring massive tax
repercussions at the same time.
WHO IS A GOOD CANDIDATE FOR
ROTH CONVERSIONS?
If your client is considering a Roth conversion, they
may be a good candidate for the process if they
meet the following criteria:
* Anyone who's afraid that they'll enter a higher tax
bracket when they retire. You might be wondering,
how could that happen? Well, one way this could
happen is because of the requirements the IRS
places on someone when they reach 72. The IRS
requires minimum distributions at 72. These
withdrawals, when added to your Social Security,
pension and any other income you might have, could
bump you into a higher tax bracket.
* Retirees between the ages of 60 to 72 who rely
heavily on Social Security to pay their bills. The
72 cut-off here is very important because you
want to make the conversion to a Roth before the
required minimum distributions kick in. The IRS
doesn't allow you to convert required minimum
distributions to a Roth.
* Investors that are trying to leave a legacy for their
heirs and want to lower their tax burden as much
as possible.
For a lot of people, it makes sense to convert
to a Roth account. However, there are some
exceptions to the rule where a conversion may
not make sense.
WHO IS A BAD CANDIDATE FOR
ROTH CONVERSIONS?
We know who is a good candidate for a Roth
conversion, but who is a bad candidate? A few
times when converting to a Roth doesn't make
sense are when:
* A person's income is already tax-free
* Individuals in their peak earning years with
high incomes
* Converting from a traditional to Roth IRA may
increase Medicare Part B premiums
Sitting down with clients and running scenarios
on their retirement accounts can provide
great insight into the benefits or drawbacks of
converting to a Roth IRA. While many investors
32 JUNE 2022 ■ www.CPAPracticeAdvisor.com
By Joseph Graziano, CFP®
find conversions beneficial, they're certainly not
ideal in every situation.
ADDITIONAL CHANGES IN THE
SECURE ACT
The SECURE Act introduces many changes that
are important to retirees, or potential retirees,
including:
* Required minimum distributions (RMDs) starting
at 72 rather than 70 1/2
* Non-spouses inher it ing IRAs must take
required minimum distributions that empty the
account in 10 years
* 401 (k) plans can now offer annuities
Confusion on the 10-year rule has been
swirling since the Act was passed. Initially, it was
thought that the new rule would follow the old
5-year rule. For example, if non-spouse beneficiaries
do not take RMDs for some reason, a massive
50% penalty is assessed on the missed distribution.
Unfortunately, it's up to the beneficiary to make
all of these calculations and ensure that they zero
the account.
However, the IRS has since clarified that
beneficiaries do not need to take RMDs. Instead,
the account must be emptied in the 10-year period.
WHY IS THIS IMPORTANT?
Money in the account can continue to grow taxfree
during this period before being withdrawn.
Concentrations around Roth IRAs are rising
in popularity in 2022 because of the changes
in the SECURE Act. If investors want to lower
their tax burden and maximize their backdoor
contributions, there's no better time than before
time runs out. ■
Joseph Graziano, CFP® is the vice president and wealth
management partner at FFP Wealth Management.
Through FFP, he and his team help manage over $2.4
billion in assets. FFP Wealth Management has served
the unique needs of the accounting community for over
28 years and was formed out of a dire need for accountants
and financial planners to join forces in providing
premium services to their clients.
http://www.CPAPracticeAdvisor.com
june2022

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