Timely and Relevant News: Year-End Roth IRA Planning Strategies

Proposed tax law changes and possible elimination of backdoor and "mega/jumbo" backdoor Roth contributions could be another reason to consider executing on these strategies sooner rather than later.

Take Advantage of Low Tax Rates

While there are proposals to raise rates for some taxpayers, rates for 2021 remain historically low as part of the Tax Cut and Jobs Act that became effective for the 2018 tax year. Therefore, Roth IRA conversions may be more economical this year than future years.

Consider Your Charitable Contributions to Help Offset Taxes

With the solid gains in the stock market over the past several years, appreciated securities can be an excellent vehicle for making charitable donations. For clients who are charitably inclined, this can be a great planning opportunity. The owner of appreciated securities incurs no tax liability for gifting the securities to charities. If the appreciated securities were otherwise sold, the gain would become realized with a tax liability.

These higher charitable deductions can be used to offset some or all of the taxes that would be due on a Roth IRA conversion.

Paying Taxes for the Next Generation 

The December 2019, Secure Act mandates that inherited IRAs for most non-spousal beneficiaries must be fully depleted within 10 years of inheriting the account. Roth IRAs have become a viable estate planning tool.

While inherited Roth IRAs are subject to this 10-year rule, most beneficiaries will not be required to pay taxes on distributions from the inherited Roth IRA. 

Within your estate planning, if you anticipate leaving a significant IRA balance to a non-spousal beneficiary either directly or via a surviving spouse, you might consider doing a ROTH IRA conversion in today’s low tax rate environment, essentially paying the taxes for your beneficiaries. 

Backdoor and Mega Backdoor Roths 

Current proposed legislation could end the " backdoor and mega/jumbo" backdoor Roth strategies after Dec. 31, 2021. The legislation would also discontinue the ability to do a Roth conversion on money contributed to a traditional IRA or 401(k) on an after-tax basis. 

If you have been considering a backdoor Roth IRA for 2021, you may want to take action prior to Dec. 31 of this year.

The opportunity to make a “mega/jumbo” backdoor Roth contribution is in-part dependent on your employer's retirement plan and consists of contributing after-tax money to a retirement plan over and above the normal 401(k) participant contributions limits. which is then converted to a Roth IRA.

If you have specific questions related to your own investment strategy or financial planning needs, we welcome you to call us at 302.234.5655 or email us at contactus@covenantwealthstrategies.com to set up time to discuss further.


The content is developed from sources believed to be providing accurate information. The information in this material is for general information only and not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation.