Hard times bring great opportunities.
There, I’ve said it for you – that hoary old chestnut you’re too wise to speak.
The principle holds true, though, and with the pandemic still running strong, we should be happy to glean a few gilded opportunities. Our topic today is the Roth IRA conversion and the currently advantageous conditions to accomplish it, or perhaps simply launch a new account of this flavor.
If our topic sounds dull, consider again, because chances to build – in this case, for a comfortable retirement, or perhaps something nice to leave to deserving heirs – should never be taken lightly. I’ll do my best to keep our message peppy.
One thing I don’t like about the world of finance – it’s the hours. I don’t mean the workday’s duration – I’m surprised how lazy I’m not – but rather that old happy sun, ever calling us to park or beach, insensitive to our four-walled predicament. I’d much rather work in the dark, but in our profession, the night shift just ain’t a thing.
There are workarounds. In Moscow, over the long winter months, you can rise in darkness and exit the office in same. The days are cloudy-bright, casting a subdued light that gives the workday a dreamy glow, all while it intensifies the pastel buildings of the old city. Walking home in the evening, the experience could be heightened by music – I had an early, cranky iPod back then – and Joy Division or Erik Satie were equally effective at romantically enhancing Moscow’s often snowy, sometimes starry nights.
In Singapore, working as an equity research editor, I snagged the morning shift. Up at 4:00 am, out the door at 5:30 sharp, never late for work, except that one time the cab driver insisted he’d never heard of Marina Bay Financial Center, rather like a Parisian hack saying I was fool-eesh not to realize the Eifel Tower is in Milan. A brisk walk to the cab rank through a world of monstrous bats, wolf-whistling birds and chirping lizards, a normally calm ride conducive to some ante meridiem sighing, and arrival at the office before the CEO – I loved the night life, no need for boogey. Just let me at that morning meeting agenda.
Hang on, passengers, we are approaching our Roth IRA destination: next stop, Delaware. This wonderful product was sponsored by Senator William Roth of the state in question, introduced in the Taxpayer Relief Act of 1997. Roth originally developed the idea with Senator Bob Packwood of Oregon, where I’ve never been, but the first gentleman’s perseverance in following through was rewarded by making the bill forever eponymous.
For most Northeasterners, Delaware is a miniscule patch on the I-95 that we plunge through on our way to someplace grander – in our minds, anyplace. If you make the trip, tip your hat to Senator Roth, for his bill is a near-perfect specimen of that rara avis – legislation that truly serves the sovereign public. At times it seems such birds are the stuff of dreams alone. Yet, here we have it.
Indulge me for careening off onto a sideroad, but Delaware has another landmark to celebrate: its glorious chemical works. At night, the giant complexes present a show of exotic lights and occasional gas flares, exciting to the eternal boy inside the man who habitually works cooped-up in quadratic drabness.
I lived in Washington DC for many years, and when I’d drive north to Massachusetts to see my parents, I’d habitually leave at 11:00 pm, the better to enjoy the night world pulsing while the boring people (me, now) are asleep – and to relish those magnificent chemical plants of Delaware.
I told my father about it once, figuring he’d think, “How did a straight-arrow like me spawn such a knucklehead?” But no; he replied, “Oh, you should have seen them in the old days, before modernization. It was like driving through Danteez Infoy-no.” I’m sorry, dear readers, we didn’t grow up in the 1920s or ‘30s. We’ll never talk that kind of swell.
Don’t lose heart: Roth IRAs – I told you I’d get us there – are nifty, too, in their own peculiar ways. With traditional IRAs, you pay into the account before any tax is levied, and the money grows tax deferred; but taxes are due when you withdraw the funds in retirement. Roth IRAs work in mirror: you pay post-tax, but when it comes time to withdraw, the principle and earnings can be taken out tax-free.
Roth IRAs are right for people who expect to be in a higher tax bracket in retirement than they are today. This can work for clients in several ways. Let’s say you’re young and starting in your first job. You’ll likely be in a higher tax bracket later in life, when your career is established. For these people, launching a Roth IRA makes great sense. Anyone in a low-income bracket who intends to make hay in the future can similarly benefit.
Roth IRAs remain an excellent way to transfer wealth to heirs. The beloved stretch-IRA strategy is no longer viable, but the product offers sufficient flexibility to keep most heirs out of tax trouble if they skillfully exploit the ten-year window for taking distributions. The Roth IRA offers many advantageous retirement and estate-planning features, but with rather intricate rules, so we recommend launching conversations with financial specialists soon.
There is reason to hurry: today’s tax and financial situation, however dolorous, is prime time for turning a white-bread IRA into its attractive Delaware cousin. Tax rates are wonderfully low now, a perfect launchpad for a Roth IRA conversion. But – and there often is one, isn’t there? – these conditions should not be counted on to last.
Individuals may also find that 2020 was not their best earnings year, with the palliative benefit of landing in a lower tax benefit. Again, this creates a good time to act.
Holders of traditional IRAs may have seen their account values plunge in recent months. However painful, this sets up good conditions for converting the account into a Roth IRA, as the reduced balance means a lower tax charge when making the conversion. Even an inferno, it seems, can smelt out a silver lining.