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2020 Tax Planning: Converting to a Roth IRA and the AMT

2020 Tax Planning: Converting to a Roth IRA and the AMT

December 22, 2020

In the last few weeks, we’ve covered a variety of tax planning tips on our blog. Today, we wrap up the series with our final topic, which includes Roth IRA considerations and the alternative minimum tax.

If you missed our previous posts, we’ve covered: timing your income and deductions, making the most of your retirement and health savings accounts, being smart about charitable donations, keeping taxes to a minimum on the investments in your taxable accounts, and minimizing taxes on your estate and inherited retirement accounts. Many of these strategies need to be completed by the end of the year to be effective, and not all of the strategies may be appropriate for you.

Is this a good year to convert to a Roth IRA?

If you have been thinking about converting your tax-deferred traditional IRA to a tax-free Roth IRA, talk to your financial professional about whether this is the year to do it.

Converting to a Roth IRA will allow you to make tax-free withdrawals in retirement and to avoid having to take RMDs. However, there is a tax cost to converting. Any savings you convert that were not previously taxed will be subject to ordinary income tax in the year of the conversion.

One reason to consider a Roth conversion this year is that federal income tax rates are still relatively low so you may pay less tax on a conversion this year than in later years. (Federal income tax rates are scheduled to increase after 2025.)

Will you have to pay the AMT?

The alternative minimum tax (AMT) is an alternative method of calculating tax that eliminates or reduces some of the deductions and exclusions from income tax that are allowed when calculating tax the regular way.

Far fewer people are currently subject to the AMT than prior to 2018, thanks to changes made by the Tax Cuts and Jobs Act. However, the AMT is still a possibility for some people, particularly high-income individuals who exercise incentive stock options without selling the stock in the same year or who receive tax-exempt interest from private activity bonds.

It is a good idea to find out whether you may be subject to the AMT before making any year-end tax moves. If it looks like you will be, your tax professional can recommend strategies for minimizing the AMT’s impact or perhaps avoiding it altogether.

If you have any questions about converting your Roth IRA, the alternative minimum tax, or any of the other topics we’ve covered in our 2020 tax planning series, please contact us. We’re happy to help.