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Posted on December 24, 2018

The Markets are Down for 2018 – There is always a Silver Lining

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3 considerations to execute a ROTH IRA conversion before year end

By Christopher Abla AWMA®, AAMS®, CRPC®, Wealth Advisor

FIRST – The Tax Cuts and Jobs Act passed in late 2017 has gone into effect for our 2018 tax year. This sweeping tax legislation has temporarily reduced the marginal tax rates for virtually every tax payer.  Lower rates are scheduled to potentially revert to prior rates in 2025 without additional congressional intervention. 

If you are an investor with Traditional IRA accounts now may be the opportune time for you to consider executing a ROTH IRA conversion by year end.  A ROTH conversion will allow an investor to convert all or a portion of their Traditional IRA (pre-tax) account balances into a ROTH IRA.  Income taxes would be due in the year of the conversion at the current tax rates in exchange for tax-free distributions later.  ROTH IRAs are also not subject to the 70 ½ age minimum distribution requirements nor are they taxable assets to your heirs.

SECOND – A additional benefit from the recent tax legislation is the elimination of the so-called “marriage penalty”.  Under the previous tax rules, couples with household income that was exactly double that of an individual tax payer often found themselves in a higher tax bracket than the single filer.  The new tax laws bring more equality between single and married taxpayers.

THIRD – As of last Friday (12/7/2018) the S&P500 index was down 1.5% for the calendar year and approximately down 10% from its peak – with continued volatility expected.  The combination of lower tax rates and a depressed market offer investors with a unique opportunity to convert their taxable IRA accounts to ROTH IRAs.  Because you convert the shares to a ROTH IRA selling out of your assets is not required and you are taxed on the value of the shares on the date of conversion.  This can offer great advantages during a period of depressed valuation.  Important to keep in mind is that you must be able to pay the tax liability from cash or other assets as you cannot use the IRA funds to pay the tax liability.

I recommend that you work with a professional advisor so that you can understand the overall impacts of a conversion on your personal situation.

  • How could it impact your current tax liability?
  • What may be the impact to your RMD at age 70 ½? (conversions can help to reduce future RMD requirements)
  • Is your tax liability lower than your heirs thus creating additional tax benefits in the transfer of generational wealth?

Volatile or down markets will often provide investors with new opportunities to gain benefits from near term changes in value. Speak with a professional advisor and your CPA before the crystal ball falls on 2018 and opportunities may be lost.

Investors should consider their financial ability to continue to purchase through periods of low price levels. Investors cannot invest directly in indexes. The performance of any index is not indicative of the performance of any investment and does not take into account the effects of inflation and the fees and expenses associated with investing.”

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