Roth conversions were the question on the table during a discussion I had recently. With the markets down, someone who had been contributing to a traditional IRA wanted to know if they should do Roth conversions during the current financial mess accompanying the COVID-19 pandemic.

Roth conversions are all about present and future tax rates, trying to pay less in lifetime taxes, plus whether you want to be forced to do Required Minimum Distributions (RMDs. Roth 401k’s are still subject to RMDs, if you aren’t planning to roll yours to a Roth IRA after separation from service. Roth IRAs aren’t subject to RMDs).

Before we know whether Roth conversions are the best strategy for us right now, we need to know what tax strategies are available to us.

First, yes we are in a low tax bracket scenario right now, courtesy of the TCJA. Second, every year we are limited on the amount of tax-advantaged dollars we can shelter from the government, via routes like annual limits on our contributions to our 403bs, our 401ks, our IRAs; we can never go back to make up any missed contributions there. And third, tax conversions from pre-tax to Roth are extra nice right now, because market values have dropped so much, you’re paying taxes on a conversion value that’s much smaller.

Due to the first but especially second point, you might want to consider starting by making your 2019 IRA (if you haven’t already contributed, this year you get up to July 15th 2020 to make that contribution) and your 2020 IRA contributions. Making them as Roth would be a good start (max $6k each of those two years, $7k if you’re at least 50), if you have the cash differential to pay the increased tax bill.  But you can wait to make the 2020 Roth/traditional IRA contributions until after the COVID stuff shakes out, so you can know for sure if you can afford even that much extra tax bill.

Also due to the first but especially second point, if you can make Roth 403b/401k contributions, that’s also good; max employee contribution this year is $19,500 for us young’uns, or $26k for the young at heart. Those typically have to be being spread out across the calendar year through your paychecks, so you may have to be making this decision sooner instead of later.

Then after that, and assuming you have the cash on hand to pay the tax bill directly, yes it can make quite a lot of sense to do Roth conversions over the next few years and especially right now, depending on where you are in the tax brackets. Many 403b or 401k plans don’t allow in-plan conversion, and often the ones that allow in-plan conversion are the same ones that allow after-tax contributions; after-tax contributions can also be a useful thing to consider if you’re positive you don’t want to be able to touch the money until retirement.  Your IRA is much more dependable from a “am I allowed to make a conversion” perspective. If you want to do conversions (403b/401k/457b or IRA), the easiest way to look at the tax implications is to run some dummy tax returns, just add various amounts you’re considering converting to your W2 income in line 1 and see how the total tax bill changes.  It also helps if you know where you are vs the tax bracket thresholds.  Of course, that’s also dependent on total income this year, and if your job doesn’t stay stable for the whole year you might have a really low income year to “benefit” from in Roth conversions – again assuming you have the cash to stay afloat during the downturn, and if you don’t then all of this discussion is moot, make sure you’re keeping up with your 4 walls and the basics before trying to get fancy.

Another option, with far less paperwork hassle right now, is to simply start/expand your taxable investing. There are more down the road implications on this choice, such as counting against your Expected Family Contribution at FAFSA colleges if you’ve got kids headed that way, but it’s an easy choice right now if you’re too overwhelmed to do anything else.

Ask questions. Learn. And stay well.