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SECURE Act and Roth Conversions

January 08, 2020

ROTH Conversions have been gaining popularity over the past few years as a result of lower tax brackets and the Backdoor ROTH strategy for high income earners.

The SECURE Act can now be added to that list.  One of the main provisions of the SECURE Act is an elimination of the Stretch IRA strategy for non-spouse beneficiaries. Instead, non-spouse beneficiaries must distribute all of the funds within 10 years. While under the new provisions the funds can no longer be stretched over a beneficiary’s lifetime, there is more flexibility. Beneficiaries now have the option to distribute the funds whenever they want, as long as it is all withdrawn within 10 years. 

While there may be greater flexibility the IRA distributions will still be treated as taxable income in the year distributed.  If the current IRA owner knows this may create adverse tax consequences to a non-spouse beneficiary in the future (because the non-spouse beneficiary may be in a much higher tax bracket and/or in peak earning years for many years to come), the ROTH Conversion may be a more attractive option so that the funds can be inherited tax-free in the future.  ROTH IRAs would still be subject to the 10-year distribution rule but would have no effect on the beneficiary’s tax situation, thus mitigating some of the risks associated with the new 10-year distribution rule.