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Ask the Expert: How does the 2020 RMD law affect Roth conversions? 

I'm considering converting some of my traditional IRA to a Roth IRA. I know normally one can't convert a required minimum distribution (RMD). But the new law waives 2020 RMDs. How does that affect Roth conversions?

You're right that, usually, you must withdraw and pay taxes on your RMD before doing a Roth conversion. But there is no 2020 RMD. As a result, that requirement is effectively waived this year.

As I explained last week, in a bear market it's prudent to minimize withdrawals from your retirement account. But if you can afford it, a partial Roth conversion may make sense. In a conversion, you withdraw money from a traditional tax-deferred IRA and deposit it in a tax-free Roth IRA. You'll owe current taxes on the depressed value of the amount you convert — and inside the Roth, any future increase in value will be tax-free.

There's an important caveat: A conversion pays off only if 1) you can afford the initial tax; and 2) you won't need to tap the Roth until its earnings exceed that tax, which might take years.

Normally, you must take your RMD before doing a Roth conversion. Let's say you wanted to convert $10,000, for example. If your RMD is $2,500, you must first withdraw and pay taxes on your $2,500 RMD; then you can convert and pay taxes on the $10,000. The upshot: You're taxed on $12,500, but convert only $10,000. But since there is no 2020 RMD, 100 percent of the amount you withdraw and pay taxes on this year can be converted, says Ed Slott, a Rockville Centre tax accountant. If you withdraw and pay taxes on $12,500, you can convert the entire $12,500.

The bottom line

A 2020 Roth conversion is worth considering if you can afford it.

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