Trump Accounts: The $3 Million Roth Opportunity Parents Are Missing

Trump Accounts: The $3 Million Roth Opportunity Parents Are Missing

Posted On July 18, 2026 By Scott Stratton, CFP(R), CFA In Financial Planning /   No Comments

When Congress created Section 530A accounts, commonly called “Trump Accounts”, most of the headlines focused on the $1,000 government contribution for babies born between 2025 and 2028. That’s understandable—everyone likes free money.

But after studying the legislation and recent IRS guidance, I believe the real opportunity isn’t the $1,000. It is the possibility of turning a relatively modest childhood investment account into a multi-million dollar Roth IRA.

Ironically, this opportunity may be most attractive for higher-income families who initially dismissed Trump Accounts as inferior to 529 plans, UGMA accounts, or trusts.

If you haven’t read my first article explaining how Trump Accounts work, who qualifies, and why I generally prefer other planning vehicles for wealthy families, start here: Trump Accounts for Children

This article focuses on one specific planning opportunity that deserves far more attention: the Roth Conversion option.

Who Can Use and Fund a Trump Account?

The $1,000 government contribution is limited to eligible children born between January 1, 2025 and December 31, 2028. The account itself is much broader. A Trump Account may be established for a child who has not turned age 18 before the end of the calendar year in which the election is made and who has a valid Social Security number.

Should you contribute for a 12-year-old? Yes. A 12-year-old may still have six years of contributions before adulthood, followed by decades of tax-advantaged compounding. The child does not need earned income for contributions to be made during the growth period.

Parents are not the only people who may contribute. Grandparents, aunts, uncles, friends, the child, and essentially any other person may fund a Trump Account. Employers, governments, and nonprofit organizations may also contribute under separate rules. Ordinary individual and employer contributions are generally subject to a combined $5,000 annual limit, which will be indexed for inflation after 2027.

To establish an account, visit TrumpAccounts.gov, sign in to the parent or guardian’s IRS account with ID.me, and submit IRS Form 4547. Contributions began on July 4, 2026.

What Can the Account Own?

Trump Accounts do not offer an unrestricted brokerage menu. During the growth period, investments generally must be low-cost ETFs that track a broad index of primarily U.S. companies, do not use leverage, and charge no more than 0.10% annually.

Treasury has announced a specific ETF lineup. At launch, all contributions are invested in the State Street SPDR Portfolio S&P 500 ETF (SPYM) as the default. Treasury also selected the following four funds, which parents or guardians are expected to be able to choose in the coming months:

  • iShares Core S&P 500 ETF (IVV)
  • Vanguard Total Stock Market ETF (VTI)
  • State Street SPDR Portfolio S&P 1500 Composite Stock Market ETF (SPTM)
  • iShares Core S&P Total U.S. Stock Market ETF (ITOT)

These are sensible, low-cost choices, but the menu remains restrictive. Families cannot build a diversified portfolio containing international stocks, bonds, or cash during the growth period. The Total Stock Market funds are more diversified, as they include mid-cap and small-cap stocks. There is no guarantee that the diversification will outperform the S&P 500 Index funds, but given valuations today, I like the Total Market funds.

A Traditional IRA in Disguise

During childhood, Trump Accounts operate under their own set of rules. However, beginning on January 1 of the year the child turns 18, the account is generally governed by the rules applicable to traditional IRAs. At that point, the account may be converted to a Roth IRA, subject to the normal taxation of Roth conversions.

That conversion is where planning becomes critical.

Unlike a regular Roth IRA contribution, a Roth conversion does not require earned income. The child simply recognizes taxable income on the pre-tax portion of the account and moves the assets into a Roth IRA, where future growth can potentially be tax-free. Contributions to Trump accounts are after-tax (except for employer contributions), so these will form the cost basis of the account. The gains on the Trump account will be taxable as ordinary income at the time of the conversion.

The Kiddie Tax Trap

You could convert the Trump Account to a Roth immediately at age 18. I think that there may be a better option to wait a bit longer.

If the child is still a full-time college student under age 24 and does not provide more than half of their own support through earned income, the Kiddie Tax may apply. In that case, much of the taxable conversion income could effectively be taxed using the parents’ marginal tax rate rather than the child’s.

The Kiddie Tax age test is determined at the end of the tax year. The calendar year in which the child turns 24 is often the first opportunity to complete a Roth conversion without the Kiddie Tax applying solely because of age.

That creates an attractive planning window for many families.

A Better Conversion Strategy

Rather than converting the entire account at age 18, consider this sequence:

• Continue allowing the account to grow during college.

• Avoid large Roth conversions while the Kiddie Tax may apply.

• Beginning in the calendar year the child turns 24, evaluate converting the account over two or three low-income years.

Spreading the conversion over multiple years can significantly reduce the overall tax bill by keeping more of the taxable income within the lower federal tax brackets.

An Example

Suppose parents contribute the maximum $5,000 annually from age 1 through age 17. Assume the investments earn 7% annually. By age 18, the account would be worth approximately $160,000.

For this example, assume the entire $5,000 annual contribution comes directly from the parents using after-tax dollars. Over 17 years, the parents contribute $85,000, creating an $85,000 cost basis. The remaining $75,000 represents investment growth.

Trump Account basis is allocated proportionately to each distribution or conversion. You cannot convert only the gains or only the basis. If the entire $160,000 account is converted, $85,000 would represent a tax-free return of basis and $75,000 would be taxable income.

Using today’s 2026 federal income-tax rates, assume the child is single, is not subject to the Kiddie Tax, and has no other income. They claim the $16,100 standard deduction.

Converting the entire account in one year

  • $160,000 gross conversion – $85,000 of basis = $75,000 of taxable conversion income.
  • $75,000 of taxable conversion income – $16,100 standard deduction = $58,900 of taxable income.
  • Federal tax = $7,670 (2026 tax rates).

Spreading the conversion evenly over two years

  • Each $80,000 gross conversion includes $42,500 of basis and $37,500 of taxable conversion income.
  • $37,500 of taxable conversion income – $16,100 standard deduction = $21,400 of taxable income in each year.
  • Federal tax each year = $2,320. Over two years, the estimated federal tax is $4,640.

Spreading the conversion over two low-income years reduces the estimated federal tax from $7,670 to $4,640, a savings of $3,030. Actual results 18 or more years from now will depend on future tax law, the child’s other income, the account value at conversion, and state taxes.

Those conversion taxes should ideally be paid with outside funds, not from the Trump Account itself. Paying the tax separately allows the entire account balance to enter the Roth IRA, maximizing decades of future tax-free compounding. This may require the Parents gifting the money to cover the tax bill, but it makes a lot of sense to do it before your kids start earning a high income.

The Self-Employed Opportunity

Self-employed parents have another planning opportunity.

A business may contribute up to $2,500 per employee to Trump Accounts under an employer contribution program. The $2,500 limit is per employee, not per child, and it counts toward the child’s overall $5,000 annual limit. If both spouses legitimately work in the business as employees, each spouse may qualify for a $2,500 employer contribution. Whether a business owner qualifies as an employee depends on the entity and compensation structure, so this should be confirmed with a tax advisor.

These employer contributions may be tax deductible to the business, subject to the applicable rules, and are excluded from the employee-parent’s current taxable income. However, they do not create after-tax basis in the child’s account.

That changes the Roth conversion calculation. If the annual $5,000 contribution consists of $2,500 from the parents and $2,500 from the employer for 17 years, the account would have only $42,500 of basis rather than $85,000. At a $160,000 account value, approximately $117,500 would be taxable during a full Roth conversion.

Using the same assumptions and today’s 2026 tax rates, converting the entire account in one year would produce an estimated federal tax bill of $17,020. Splitting the conversion evenly over two low-income years would reduce the estimated total to $9,740. The employer contribution therefore creates an immediate tax benefit for the family or business, but it also transfers a larger future tax liability to the child. This is still beneficial both for the years of potential tax deferral, plus the parents are likely in a much higher tax bracket than the children at the age of Conversion.

Business owners should also remember that employer contribution programs are subject to nondiscrimination rules. They generally cannot be structured solely to benefit owners while excluding rank-and-file employees. You may have to provide this benefit to all employees.

The Long-Term Payoff

This is where the math becomes remarkable.

Suppose the child successfully converts the entire $160,000 account into a Roth IRA after paying the conversion tax from outside funds.

A $160,000 Roth IRA at age 18 earning 7% annually until age 65 would grow to approximately $3.85 million. The actual balance converted later—perhaps beginning in the year the child turns 24—would be different, but this illustrates the value of 47 years of compounding at 7%.

At Retirement, all of that $3.85 million account could be withdrawn tax-free under the current Roth IRA rules. That is an extraordinary gift to your children or grandchildren by investing just $5,000 a year from ages 1-17. The Roth Conversion opportunity is what really makes this so brilliant: Without the conversion, you would still have $3.85 million, but in a Traditional IRA. And that would be fully taxable!

Does This Change My Opinion of Trump Accounts?

Somewhat.

In my first article, I concluded that wealthy families should generally prioritize 529 plans, UGMA/UTMA accounts, and trusts over Trump Accounts. I still believe that is true for many situations.

A 529 plan remains the better vehicle for college funding because qualified withdrawals are tax-free.

UGMA/UTMA accounts continue to offer greater investment flexibility, favorable long-term capital gains treatment, and no $5,000 annual contribution cap.

Trusts remain the superior solution for larger estate planning strategies.

However, the Roth conversion opportunity makes Trump Accounts much more compelling than I originally believed.

For families willing to follow a disciplined long-term strategy, a Trump Account may become an outstanding retirement planning tool rather than simply a children’s savings account.

That is a very different way of thinking about these accounts.

The best strategy for many affluent families may be surprisingly simple:

Take the free $1,000 if your child qualifies. Contribute the maximum $5,000 a year until the year when they turn 18. Then convert it thoughtfully to a Roth IRA during the child’s low-income years—ideally over multiple years and with taxes paid from outside funds. Look out for the Kiddie Tax.

Sometimes the greatest opportunity isn’t found in the government incentive. It’s found in the tax planning that comes afterward.

Disclaimer: The 7% hypothetical return used in this article is not guaranteed. Past performance is no guarantee of future results and investments are subject to the potential for loss.

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Roth Conversions After 60

Roth Conversions After 60: When They Make Sense—and When They Don’t

Posted On September 10, 2025 By Scott Stratton, CFP(R), CFA In Financial Planning, Tax Strategies /  

For baby boomers and pre-retirees with $500,000 to $5 million in investable assets who want a fiduciary advisor they can work with remotely.

Roth conversions after age 60 can be a powerful tax-planning tool when used thoughtfully, but they are not automatically the best choice for every retiree. Whether a conversion makes sense depends on your current tax situation, future tax expectations, Social Security timing, Medicare implications, and retirement income goals.

What Is a Roth Conversion?

A Roth conversion moves money from a Traditional IRA or 401(k) into a Roth IRA by paying taxes now so that future growth and withdrawals are tax-free.
Traditional accounts grow tax-deferred and are taxed as ordinary income when withdrawn. In contrast, once assets are in a Roth IRA, they grow and can be withdrawn tax-free for life.

When Do Roth Conversions Make Sense?

Roth conversions generally make sense when you expect your current tax rate to be lower than your future tax rate or when tax diversification enhances your retirement plan.

Lower Tax Rates Now vs. Later

Converting in years when your income is relatively low — for example, after retiring but before taking Social Security — can result in paying less tax upfront.

Avoiding or Reducing Future RMDs

Roth IRAs do not have lifetime required minimum distributions (RMDs), unlike Traditional IRAs. Converting to a Roth can reduce future RMDs — here’s how to manage required minimum distributions.

Tax Diversification and Estate Planning

Having Roth assets provides flexibility in retirement withdrawals and can reduce the tax drag that comes with RMDs, while also offering a tax-free legacy to heirs.

Conversions in Lower-Value Markets

Converting during a market downturn means you pay tax on a lower base and allow the Roth portion to grow tax-free when the market recovers.

Roth conversions rarely make sense in isolation. They should be evaluated as part of a broader tax planning for retirees strategy that coordinates income, Medicare premiums, and future Required Minimum Distributions.

When Roth Conversions May Not Make Sense

Roth conversions are not always beneficial — especially if they trigger higher taxes or costly side effects.

Higher Current Tax Brackets

If converting pushes you into a much higher marginal tax bracket, the immediate tax cost may outweigh long-term tax benefits. For example, are you subject to the 3.8% Medicare Surtax?

Medicare IRMAA Impacts

Roth conversions increase MAGI and can affect Medicare premiums — learn how to reduce IRMAA.

Social Security Tax Interactions

Higher income from conversions may increase the taxable portion of Social Security benefits or affect tax bracket thresholds.

Charitable Goals or QCDs

If a large portion of your IRA assets will go to charity, converting may not be advantageous. Qualified Charitable Distributions (QCDs) can achieve similar goals without paying tax.

Low Future Tax Expectations

If your future tax rates will be lower — due to relocation to a no-tax state or anticipated lower income — conversions may have less value.

How to Evaluate a Roth Conversion

Proper evaluation requires side-by-side tax scenario analysis over your expected retirement horizon.

  1. Project current vs. future tax rates
  2. Consider Medicare, Social Security, and IRMAA effects
  3. Estimate the timing and size of RMDs
  4. Model multi-year conversion strategies
  5. Analyze impacts on estate planning and legacy goals

This type of analysis is best done with planning tools or with a fiduciary who runs these scenarios as part of a comprehensive plan.

What Many Advisers Miss

Conversions cannot fix every retirement issue. They are just one lever in a broader strategy that includes:

If you want a full set of questions to assess an advisor’s process — including how they approach tax strategies like conversions — check out our guide: Questions to Ask a Financial Advisor.

Realistic Examples (High Level)

Beneficial Scenario:
A 62-year-old retiree with moderate income converts modest amounts each year in the gap years between retirement and starting RMDs. This reduces future RMDs and grows tax-free assets.

Less Beneficial Scenario:
A 68-year-old with significant Social Security income and Medicare IRMAA thresholds may pay more in tax and premiums in the year of conversion, reducing the net benefit.

Each situation is unique and should be modeled specifically.

How We Approach Roth Conversions

We integrate Roth conversion planning into your overall retirement income strategy. That means:

  • Understanding your tax situation
  • Considering Medicare and Social Security timing
  • Coordinating with cash flow needs
  • Evaluating impacts on estate planning

We work with clients nationwide and can help you explore whether conversion strategies fit your financial goals. Roth conversions can materially improve long-term outcomes when coordinated with withdrawal strategy and cash-flow needs as part of thoughtful retirement income planning.

If this topic feels important to your retirement plan, you might also be interested in our Who We Help page to see if our approach aligns with your needs: Who We Help: Retirement Planning for Retirees and Pre-Retirees Nationwide.

This topic is often part of a broader retirement or tax planning conversation. If you’d like help applying these ideas to your own situation, you can request an introductory conversation here.

Frequently Asked Questions

Should I convert to a Roth IRA after age 60?

Roth conversions after age 60 can make sense when your current tax rate is the same or lower than your expected future tax rate, but the decision depends on Social Security timing, Medicare IRMAA, and your overall retirement income plan.

Will a Roth conversion increase my Medicare premiums?

Yes. Large conversions increase your adjusted gross income (AGI), which may trigger higher Medicare Part B and D premiums under IRMAA rules.

Related Retirement Income Topics
– Retirement Income Planning
– Guardrails Withdrawal Strategy
– Social Security: It Pays to Wait
– Required Minimum Distributions
– What Is a MYGA?

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12% Roth Conversion

The 12% Roth Conversion: Why It Still Matters in 2026

Posted On February 23, 2020 By Scott Stratton, CFP(R), CFA In Retirement Planning /  

For baby boomers and pre-retirees with $500,000–$5 million in investable assets who want a fiduciary advisor and are comfortable working remotely.

A “12% Roth conversion” is a strategic approach to using the 12% federal income tax bracket to convert pre-tax retirement dollars into Roth IRA dollars without jumping into a higher marginal tax rate — potentially saving taxes over the long term. This concept is still relevant in 2026 for many retirement income strategies.

What Is a Roth Conversion?

A Roth conversion moves money from a Traditional IRA or other pre-tax plan into a Roth IRA, where future growth and qualified withdrawals are tax-free.
When you convert, the converted amount is added to your taxable income for the year and taxed at ordinary income tax rates. This requires careful planning so that the conversion stays within a tax bracket that minimizes the tax cost.

Roth conversions also reduce future required minimum distributions (RMDs), because Roth IRAs are not subject to RMDs during the owner’s lifetime.

Why the “12% Roth Conversion” Strategy Is Still Useful in 2026

The idea behind a 12% Roth conversion is to use the width of the 12% federal income tax bracket to convert pre-tax retirement assets without triggering a jump into the 22% bracket.
In 2026, the federal income tax system still has a 10%, 12%, 22%, 24%, 32%, 35% and 37% structure.

Planning your conversions to fill up the 12% bracket means you’re paying tax at a relatively low marginal rate while preserving room in higher brackets for other income like Social Security, pensions, or RMDs.

2026 Tax Brackets Matter

Because IRS inflation adjustments happen annually, the exact income range for the 12% bracket changes each year. In 2026, the 12% bracket remains a meaningful range that many pre-retirees can use efficiently before conversions push them into 22%.

The standard deduction for 2026 has also increased. For a married couple filing jointly in 2026, the 12% bracket goes all the way up to $100,800 in taxable income. With a standard deduction of $32,200, a couple can have gross income up to $133,000 and remain inside of the 12% tax bracket. So if your joint income is under $133,000, this is for you.

In this context, a Roth conversion strategy that fills up the 12% bracket can be especially useful when done in lower income years before RMDs begin. It may also be beneficial to defer starting Social Security for several years, if you are able to wait.

How a 12% Roth Conversion Actually Works in Practice

Step-by-Step Thinking

1) Estimate Your Taxable Income Without a Conversion
Consider all retirement income (Social Security, pensions, distributions, etc.) before conversions. Your goal is to identify how much room exists in the 12% bracket after accounting for the standard deduction.
AI tools and tax software can help model this.

2) Determine Conversion Amounts That Stay Within the 12% Bracket
Once you know your base income, you can calculate how much traditional IRA/401(k) assets to convert so that you end the year at the top of the 12% bracket, not above it. This means you’re paying tax at relatively low rates and not unnecessarily increasing future Medicare premiums or other surtaxes.

3) Evaluate Interaction With Other Credits and Surcharges
Conversion decisions can impact other parts of your tax situation — like Medicare IRMAA, Social Security taxation, and capital gains. An advisor can help you model these impacts comprehensively.

Because Roth conversions add to your income, you must be careful not to push yourself into a much higher marginal bracket, where the tax cost may outweigh the benefit of tax-free growth later.

Why 2026 Is Still a Strong Year to Consider This Strategy

1. Higher Standard Deduction and Bracket Thresholds Help You Stay in Lower Rates
The 2026 standard deduction and inflation-adjusted brackets give many retirees more room to convert without hitting higher marginal rates, making conversions that stay within the 12% bracket more accessible. It remains possible that a future administration will seek to raise income tax rates, given the massive deficits we are running now.

2. Roth In-Plan Conversions Are Now Available for TSP Accounts
Starting in 2026, federal employees and retirees can convert pre-tax TSP funds directly to the Roth TSP balance within the plan, offering another tool for strategic Roth planning.

3. Roth Conversions Still Bolster Long-Term Tax Planning
Converted assets grow tax-free forever, can reduce taxable required minimum distributions later, and provide more flexible withdrawal sequencing in retirement. Your beneficiaries, such as a spouse or children, also can receive your Roth IRA tax-free.

Who Benefits Most From a 12% Roth Conversion

This strategy is most useful for:

  • Retirees and pre-retirees who have room in the 12% or 22% tax brackets
  • Years where taxable income (without conversion) is relatively low
  • Individuals not subject to very high Medicare IRMAA surcharges
  • Anyone aiming to reduce future RMDs and lifetime tax drag

For baby boomers and pre-retirees with $500,000–$5M in investable assets, this can be a powerful planning tool — especially when conversions are integrated with Social Security timing, RMD planning, and total tax modeling.

When a 12% Roth Conversion May Not Make Sense

It may not be advantageous if:

  • Conversion would push you into the 22% bracket or higher
  • You lack cash outside retirement accounts to pay the tax
  • You are near Medicare IRMAA thresholds that would increase premiums
  • You are under 65 and receive a Premium Tax Credit through Obamacare
  • Your projected future tax rates are lower than current rates
  • You need the money within 5 years. Each Conversion is subject to a 5-year waiting rule.

Conversions also cannot be undone; once you pay the tax, the decision is permanent under current law.

Additional Roth Conversion Considerations

Conversion Rules Still Apply in 2026

  • You must report the conversion on IRS Form 8606.
  • Converted amounts are taxed as ordinary income in the year of conversion.

Pro-Rata Rule for Partial Conversions: If you have multiple IRA accounts, the IRS uses the pro-rata rule to determine taxable portions of conversions.

Roth Inside Employer Plans: Some employer plans (like 401(k)s or 403(b)s) allow in-plan or in-service Roth conversions, but rules vary by plan.

How We Approach 12% Roth Conversions

At Good Life Wealth Management, we evaluate Roth conversion strategies — including 12% conversions — as part of a holistic retirement plan.
That means we:

  • Coordinate with Social Security timing
  • Model Medicare IRMAA and surtax effects
  • Analyze RMD interactions
  • Consider your overall tax picture and goals

If you’re thinking about Roth conversions and want help optimizing them within your retirement income strategy, we work with clients nationwide through remote planning and are happy to help you evaluate your situation.

👉 You might also find our Questions to Ask a Financial Advisor helpful if you are comparing advisors or considering professional guidance.

This topic is often part of a broader retirement or tax planning conversation. If you’d like help applying these ideas to your own situation, you can request an introductory conversation here.

Frequently Asked Questions

What is a 12% Roth conversion?
A 12% Roth conversion means converting just enough pre-tax retirement dollars into a Roth IRA so that the conversion income fits within the 12% tax bracket, avoiding higher marginal tax rates.

Can I do a Roth conversion inside my 401(k) or TSP?
Some plans allow in-plan Roth conversions, including new options for Roth TSP conversions starting in 2026, but plan rules vary — check with your administrator.

Is the 12% Roth Conversion Right for Everyone?
No, there are many individual circumstances to consider.. For example, if you plan to leave your IRA to charity, conversions are an unnecessary tax.

Can I also make Roth 401(k) Contributions?

Yes, if you are a participant in a 401(k) or 403(b) plan, you may have the option to make Roth contributions (after-tax). And if you still have room in your tax bracket, you can make a Roth conversion on a Traditional IRAs or 401(k) balances, too.

Related Retirement Income Topics
– Retirement Income Planning
– Guardrails Withdrawal Strategy
– Social Security: It Pays to Wait
– Required Minimum Distributions
– What Is a MYGA?

Read More

Roth Conversions Under the New Tax Law

Posted On December 2, 2018 By Scott Stratton, CFP(R), CFA In Retirement Planning, Tax Strategies /  

Everybody loves free stuff, and investing, we love the tax-free growth offered by a Roth IRA. 2018 may be a good year to convert part of your Traditional IRA to Roth IRA, using a Roth Conversion. In a Roth Conversion, you move money from your Traditional IRA to a Roth IRA by paying income taxes on this amount. After it’s in the Roth, it grows tax-free.

Why do this in 2018? The new tax cuts this year have a sunset and will expire after 2025. While I’d love for Washington to extend these tax cuts, with our annual deficits exploding and total debt growing at an unprecedented rate, it seems unavoidable that we will have to raise taxes in the future. I have no idea when this might happen, but as the law stands today, the new tax rates will go back up in 2026.

That gives us a window of 8 years to do Roth conversions at a lower tax rate. In 2018, you may have a number of funds which are down, such as Value, or International stocks, or Emerging Markets. Perhaps you want to keep those positions as part of your diversified portfolio in the hope that they will recover in the future.

Having a combination of both lower tax rates for 2018 and some positions being down, means that converting your shares of a mutual fund or ETF will cost less today than it might in the future. You do not have to convert your entire Traditional IRA, you can choose how much you want to move to your Roth.

Who is a good candidate for a Roth Conversion?

1. You have enough cash available to pay the taxes this year on the amount you want to convert. If you are in the 22% tax bracket and want to convert $15,000, that will cost you $3,300 in additional taxes. That’s painful, but it saves your from having to pay taxes later, when the account has perhaps grown to $30,000 or $45,000. Think of a conversion as the opportunity to pre-pay your taxes today rather than defer for later.

2. You will be in the same or higher tax bracket in retirement. Consider what income level you will have in retirement. If you are planning to work after age 70 1/2 or have a lot of passive income that will continue, it is entirely possible you will stay in the same tax bracket. If you are going to be in a lower tax bracket, you would probably be better off not doing the conversion and waiting to take withdrawals after you are retired.

3. You don’t want or need to take Required Minimum Distributions and/or you plan to leave your IRA to your kids who are in the same or higher tax bracket as you. In other words, if you don’t even need your IRA for retirement income, doing a Roth Conversion will allow this account will grow tax-free. There are no RMDs for a Roth IRA. A Roth passes tax-free to your heirs.

One exception: if you plan to leave your IRA to a charity, do NOT do a Roth Conversion. A charity would not pay any taxes on receiving your Traditional IRA, so you are wasting your money if you do a conversion and then leave the Roth to a charity.

The smartest way to do a Roth Conversion is to make sure you stay within your current tax bracket. If you are in the 24% bracket and have another $13,000 that you could earn without going into the next bracket, then make sure your conversion stays under this amount. That’s why we want to talk about conversions in 2018, so you can use the 8 year window of lower taxes to make smaller conversions.

2018 Marginal Tax Brackets (this is based on your taxable income, in other words, after your standard or itemized deductions.)

Single Married filing Jointly
10% $0-$9,525 $0-$19,050
12% $9,526-$38,700 $19,501-$77,400
22% $38,701-$82,500 $77,401-$165,000
24% $82,501-$157,500 $165,001-$315,000
32% $157,501-$200,000 $315,001-$400,000
35% $200,001-$500,000 $400,001-$600,000
37% $500,001 or more $600,001 or more

On top of these taxes, remember that there is an additional 3.8% Medicare Surtax on investment income over $200,000 single, or $250,000 married. While the conversion is treated as ordinary income, not investment income, a conversion could cause other investment income to become subject to the 3.8% tax if the conversion pushes your total income above the $200,000 or $250,000 thresholds.

You used to be able to undo a Roth Conversion if you changed your mind, or if the fund went down. This was called a Recharacterization. This is no longer allowed as of 2018 under the new tax law. Now, when you make a Roth Conversion, it is permanent. So make sure you do your homework first!

Thinking about a Conversion? Want to reduce your future taxes and give yourself a pool of tax-free funds? Let’s look at your anticipated tax liability under the new tax brackets and see what makes sense your your situation. Email or call for a free consultation.

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Five Things To Do When The Market Is Down

Posted On February 15, 2016 By Admin In Behavioral Finance, Portfolio Management /  

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When the market is down, it hurts to look at your portfolio and see your account values dropping. And when we experience pain, we feel the need to do something. Unfortunately, the knee-jerk reaction to sell everything almost always ends up being the wrong move, a fact which although obvious in hindsight, is nevertheless a very tempting idea when we feel panicked.

Even when we know that market cycles are an inevitable part of being a long-term investor, it is still frustrating to just sit there and not do anything when we have a drop. What should you do when the market is down? Most of the time, the best answer is to do nothing. However, if you are looking for ways to capitalize on the current downturn, here are five things you can do today.

1) Put cash to work. The market is on sale, so if you have cash on the sidelines, I wouldn’t hesitate to make some purchases. Stick with high quality, low-cost ETFs or mutual funds, and avoid taking a flyer on individual stocks. If you’ve been waiting to fund your IRA contributions for 2015 or 2016, do it now. Continue to dollar cost average in your 401k or other automatic investment account.

2) If you are fully invested, rebalance now; sell some of your fixed income and use the proceeds to buy more stocks to get back to your target asset allocation. Of course, most investors who do it themselves don’t have a target allocation, which is their first mistake. If you don’t have a pre-determined asset allocation, now is a good time to diversify.

3) Harvest losses. In your taxable account, look for positions with losses and exchange those for a different ETF in the same category. For example, if you have a loss on a small cap mutual fund, you could sell it to harvest the loss, and immediately replace it with a different small cap ETF or fund.

By doing an immediate swap, you maintain your overall allocation and remain invested for any subsequent rally. The loss you generate can be used to offset any capital gains distributions that may occur later in the year. If the realized losses exceed your gains for the year, you can apply $3,000 of the losses against ordinary income, and the remaining unused losses will carry forward to future years indefinitely. My favorite thing about harvesting losses: being able to use long-term losses (taxed at 15%) to offset short-term gains (taxed as ordinary income, which could be as high as 43.4%).

4) Trade your under-performing, high expense mutual funds for a low cost ETF. This is a great time to clean up your portfolio. I often see individual investors who have 8, 10, or more different mutual funds, but when we look at them, they’re all US large cap funds. That’s not diversification, that’s being a fund collector! While you are getting rid of the dogs in your portfolio, make sure you are going into a truly diversified, global allocation.

5) Roth Conversion. If positions in your IRA are down significantly, and you plan to hold on to them, consider converting those assets to a Roth IRA. That means paying tax on the conversion amount today, but once in the Roth, all future growth and distributions will be tax-free. For example, if you had $10,000 invested in a stock, and it has dropped to $6,000, you could convert the IRA position to a Roth, pay taxes on the $6,000, and then it will be in a tax-free account.

Before making a Roth Conversion, talk with your financial planner and CPA to make sure you understand all the tax ramifications that will apply to your individual situation. I am not necessarily recommending everyone do a Roth Conversion, but if you want to do one, the best time is when the market is down.

What many investors say to me is that they don’t want to do anything right now, because if they hold on, those positions might come back. If they don’t sell, the loss isn’t real. This is a cognitive trap, called “loss aversion”. Investors are much more willing to sell stocks that have a gain than stocks that are at a loss. And unfortunately, this mindset can prevent investors from efficiently managing their assets.

Hopefully, now, you will realize that there are ways to help your portfolio when the market is down, through putting cash to work, rebalancing, harvesting losses for tax purposes, upgrading your funds to low-cost ETFs, or doing a Roth Conversion. Remember that market volatility creates opportunities. It may be painful to see losses today, but experiencing the ups and downs of the market cycle is an inevitable part of being a long-term investor.

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