Should You Do a Roth IRA Conversion for 2020?

Americans… You have 5 Days Left if you are considering a Roth Conversion

2020 is a very unique year… for a lot of reasons. It has been tough. It has been difficult for everyone but not everyone equally.

But it is not all doom and gloom. 2020 has a lot to teach us and it has gifted us some opportunities. Opportunities to re-evaluate what is important in life.

And, on the practical side for your FI journey, 2020 has gifted us another rare opportunity…

If you are American and you have an IRA and your income for 2020 took a hit, then you are likely in a lower tax bracket for Tax Year 2020. This could put you in a great position to take advantage of a Roth Conversion.

In this article, we will discuss:

  1. Why you might want to consider a Roth conversion for 2020
  2. How much to convert
  3. what is the Roth conversion deadline for tax year 2020
  4. Reasons you might not want to do a Roth conversion

Who Should Consider a Roth Conversion: Americans who have an IRA and want access to their IRA money before traditional retirement age without having to pay higher income tax; a Roth conversion also protects your future wealth from RMDs.

What’s the Play: You will pay income tax if you converting some or all of your IRA funds to a Roth IRA. But choosing to convert now and pay a lower income tax on the converted funds is better than paying a higher income tax later when your income is up.

How Much to Convert: General consensus is to use up all of your $12,400 personal standard deduction. Ideally, if you have not used up any of your $12,400 standard deduction and your income puts you in the lowest tax bracket (0%), then you could convert up to $12,400 from an IRA to a Roth IRA tax- and penalty-free!

Conversion Deadline: All Roth Conversions must be completed by the end of the calendar year (Dec 31, 2020), not the tax year (Apr 15, 2021).

Reasons Not to Convert: There are some valid reasons not to do a Roth Conversion and you do have to wait 5 years to access the converted money tax and penalty-free, but for most people with a FI mindset the upside is huge and the only downsides are exceptions that don’t apply to most.

Whether you do a Roth conversion for 2020 or not, I encourage you to continue connecting and learning from others, keeping a long-term perspective and live a mindful, intentional life that aligns with your values.

Happy Holidays and Best Wishes in the New Year!

–lane

2 Replies to “Should You Do a Roth IRA Conversion for 2020?”

    1. Agreed. For me, the strategy part (“is a Roth Conversion the right solution for my challenge; how does it fit into my plan?”) was much more challenging than the actual execution of the Roth Conversion. I did my conversion on Vanguard in just a few minutes. The simplicity was helped by the fact that: (1) my Trad IRA was already with Vanguard, (2) my Roth IRA was already with Vanguard, and (3) of course, I have doing the Roth conversion within my Vanguard account… that is, no outside vendor (like Fidelity or Schwab, for example) was involved.

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