Death of the Stretch IRA: Should You Convert to a Roth IRA?

Death of the Stretch IRA: Should You Convert Your IRA to a Roth IRA?

The SECURE Act killed the Stretch IRA. This could mean a nice tax bill for someone you care about. The big question that has come from this: “Should you convert your IRA to a Roth IRA?”

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Death of the Stretch IRA

In December, the federal government passed the SECURE Act. And one of the biggest provisions of that bill was the elimination of the Stretch IRA. This impacts non-spouse beneficiaries of your IRA, 401k or other retirement plan accounts. That means your kids, grandkids, etc. It doesn’t affect spouses.

Under the old rules, your kids could spread out the distributions from an inherited IRA over a long period of time. Now, your kids will have to liquidate those accounts within 10 years.

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Converting Your IRA to a Roth IRA

One strategy you can use to address this is to convert your IRA to Roth IRAs. This means you pay taxes on the amounts you convert now, and the money then grows tax-free. And when certain conditions are met, your kids won’t pay any taxes on their distributions.

Should you convert your IRA to a Roth IRA? The answer is very complicated and will be different for everyone. Here are the key considerations

1. Who Pays Higher Taxes?

Who has the higher tax rate? Converting your IRA to a Roth IRA means you pay the taxes. You have to understand who has the higher tax rate. If your tax bracket is the same as your kids, the conversion may not be worth it. But, if your kids pay taxes at a higher rate, the math changes.

State taxes also matter in this.  If your kids live in Florida where there is no state income tax, that needs to be considered.  Likewise if they live in a high-tax state—like New York—it changes the math.

2. Watch the Hidden Taxes

Pay attention to the hidden taxes? Converting your IRA could impact the taxes on your Social Security benefits. It could also trigger taxes on your Medicare premiums due to the income related adjustments. You’ll want to look at those elements too.

3. Can't Convert Your Required Minimum Distributions

If you are older than 72, you have to be careful. The rules won’t allow you to convert your required minimum distributions. You have to satisfy those before you convert.  This may make it more expensive than you think.

4. Know the Total Costs

Look at the total cost of your strategy. There are some complex strategies you can use to preserve some of the “stretch provisions.” They use some advanced trust planning. You have to weigh the cost of the trust, plus the tax costs of setting them up.

Should you convert your IRA to a Roth IRA? It’s a good question to ask and consider in your plans. But there are a lot of complexities. You should talk to a tax expert and a financial planner to help you look at all aspects.

Schedule a 15 Minute Call

Do you have a question? Would you like to talk about how we can help you plan for a better retirement?
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Do you have a question about what’s happening in the world of finance or investing?  Is there a topic that has you curious?  We’d love to hear from  you.

 We’ll do our best to answer it in a future episode.  To submit your question, fill out the form.  If you prefer, you can send us an email directly.  That email address is neal@flemingwatson.com

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Financial Planning

About the Author

Neal Watson is a Certified Financial Planner™ Professional and a Financial Advisor with Fleming Watson Financial Advisors  He typically works with people who are planning for retirement.  Fleming Watson is a Registered Investment Advisory firm located in Marietta Ohio.  Our firm primarily serves Marietta, Parkersburg, Williamstown, St. Marys, Belpre, Vienna and the surrounding communities in Washington and Noble Counties in Ohio and Wood and Pleasants county in West Virginia.

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The Financial Planners 2019 Holiday Gift Guide

What do you get the young adult child who already has everything?  How many gift cards do you really want to buy? Socks?  Really?  Fear not! We have created the Financial Planner’s 2019 Holiday Gift Guide.  And it is sure to be a big hit.   

Watch: 2019 Holiday Gift Guide

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Free Download: The Financial Planner's 2019 Holiday Gift Guide

For that last minute shopper, here is our Financial Planner’s 2019 Holiday Gift Guide.  We cover the basics of Roth IRA’s and 529 Plans.  We’ll also show you—and the lucky recipient—what kind of impact your gift can make on their life.  Click on the button to download your free copy.

The Struggle is Real!

As December rolls around each year, it is always a struggle to come up with gift ideas. And I thought maybe you were having similar problems. So I decided to come up with the financial planners holiday gift guide.

Do you have younger adult children or grandchildren? Tired of buying gift cards to restaurants they hate or ugly socks?

The Perfect Solution: A Roth IRA

What could be a better gift than years of tax free compounded growth? That’s right folks, a Roth IRA makes a perfect gift for that young adult in your life.

Just imagine the riveting conversation you’ll have sitting around the tree. You can talk about compound interest and how “You may not appreciate this now, but one day you’ll be glad you have it. Shoot I wish my parents had started a Roth IRA for me for Christmas. Instead, I got a garage door opener.”   

True Story…

One year, as a twenty-something, my parents bought me a garage door opener.  Not only was it a surprise, it was one of the best gifts I’ve ever received.  You don’t appreciate it until you have to get out of your car in a driving rain storm to open the garage door!

Cam Hardiman

This is Jim’s great grandson (and Neal and Susan’s grandson).  Cam Hardiman was born on November 3rd, 2019.

For the Young Child: Tax Free Growth, for College

We’ve all watched these kids tear into boxes like a tornado. Only to see them spend more time playing with the boxes.

Not this year.  No boxes.  No hermetically sealed plastic packaging you can only open with a blow torch. 

What could be better? You guessed it, a 529 Plan.  This means tax free growth—FOR COLLEGE! 

 

Seriously Good Gifts

Roth IRA’s and 529 plans make terrific Christmas gifts. They aren’t exciting, and you may actually be able to hear  eyes roll.

But, at some point, they will be far more useful than that pair of socks, the remote control car or even a garage door opener.

A Roth IRA offers your kids or grandkids tax free compounding for their retirement. It may not be much today. In thirty or forty years they’ll look back and say, “Wow! Mom and Dad (or grandma and grandpa) did this for me. And look at it now.”

Same thing with 529 plans. The costs of college won’t be coming down anytime soon. At some point. someone will appreciate it more than you may ever know.

Here. We'll show you what we mean.

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2019 Holiday Gift Guide
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What's On Your Mind?

Do you have a question about what’s happening in the world of finance or investing?  Is there a topic that has you curious?  We’d love to hear from  you.

 We’ll do our best to answer it in a future episode.  To submit your question, fill out the form.  If you prefer, you can send us an email directly.  That email address is neal@flemingwatson.com

Enter Your Question Here

Financial Planning

About the Author

Neal Watson is a Certified Financial Planner™ Professional and a Financial Advisor with Fleming Watson Financial Advisors  He typically works with people who are planning for retirement.  Fleming Watson is a Registered Investment Advisory firm located in Marietta Ohio.  Our firm primarily serves Marietta, Parkersburg, Williamstown, St. Marys, Belpre, Vienna and the surrounding communities in Washington and Noble Counties in Ohio and Wood and Pleasants county in West Virginia.

Our Most Recent Videos And Posts