Alliance America Logo Contact About Us Articles Home
For those with the right combination of circumstances, converting your traditional IRA or 401(k) to a Roth may now make more sense than it did before the passage of the SECURE Act.

The SECURE Act can make a Roth conversion a wise, tax-saving strategy

by Joesph Arroyo | Contributor
Feb 28, 2020


The SECURE Act has big impacts for estate planning in general, and the concept of the stretch IRA in particular. Going forward, conversion to Roth IRAs may be a more attractive strategy.

The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 is bringing about many changes to the retirement and estate planning field. These changes are designed to improve the ability of Americans to save for retirement, but they come with a big change to the way many people pass assets on to younger generations.

What does the SECURE Act change?

Prior to the SECURE Act, the stretch IRA was a popular estate planning tool. To use the stretch IRA, a person would name a younger, non-spouse, beneficiary (generally a child) of their IRA. By doing this it was possible for the beneficiary to receive Required Minimum Distributions (RMDs) over their longer life expectancy. This resulted in the potential for large tax savings.

Does converting to a Roth IRA make more sense now?

For those with the right combination of circumstances, converting your traditional IRA or 401(k) to a Roth may now make more sense than it did before the passage of the SECURE Act.

Converting non-Roth funds to Roth status involves the following steps and consequences:

  • Elect to convert all, or a portion of eligible funds
  • Pay income tax on the converted amount, at the individual/joint tax rate
  • Accumulate the converted amount within the Roth IRA
  • Funds held or accumulated in a Roth for at least five years after conversion can be withdrawn tax-free beginning at age 59 1/2.

Converting to Roth is not a good move for everyone. It can generate a very large tax bill in the year of your conversion. You must have the ability to pay the tax bill from current savings, rather than from the funds you’re converting.

If you pay the taxes from your IRA or 401(k), you’re effectively removing money from the power of compounding returns and you might never grow your account enough to offset the loss.

Also, paying taxes out of pocket should not be considered if you intend to use the accumulated IRA or 401(k) for living expenses, or if you plan to give away a large amount of your estate to charity. Instead, consider conversion to Roth if you meet these criteria:

Mother making financial plans with her baby
  • You won’t need to funds to live on (because you have a pension and Social Security, or because you’ll be using a spouse’s qualified account for living expenses)
  • You don’t plan on using your qualified account for charitable giving
  • You intend to pass your assets onto your children
  • You want to minimize the taxes your children will pay on the funds

In short, this strategy applies to retirement accounts that you don’t really “need” in order to live the life you want in retirement.

How does converting to Roth reduce taxes for your children?

Any funds that are in a Roth IRA or 401(k) for more than five years accumulate tax-free. And, since you paid income tax on the conversion, the principal can be distributed to them tax-free, too.

This is the exact opposite of how it works with traditional IRAs and 401(k)s, where you don’t pay taxes on contributions. But, when you take withdrawals, you pay taxes on both the contributions and the investment earnings.

With the converted Roth funds, your children will ultimately have to take RMDs when they turn 72. However, now that the funds they inherited are held in a Roth IRA, they should be able to receive their distributions tax-free.

An example to consider

To look at the difference Roth conversion can make to your children, we’ll look at a hypothetical example. In this example, the following assumptions will apply:

  • Qualified account owner dies at age 83
  • Assets grow at 1.5% compounded yearly
  • Account owner passes the full account balance to one child, age 55 at their inheritance.
  • The beneficiary earns $100,000 in wages per year at the passing of their parent
Graphs showing impact of Roth conversion

Scenario 1 – Funds are not in Roth account

The qualified account owner dies at age 83 and leaves $500,000 in a traditional IRA or 401(k).

Under the SECURE Act, the beneficiary must withdraw the funds over a 10-year period. This will increase their taxable income by $50,000 per year. Based on 2020 tax rates, this extra income will raise their taxes by $12,001 per year. They will pay an extra $120,000 in income taxes over 10 years.

Scenario 2 – Funds are converted to Roth

The qualified account owner converts the qualified account to Roth status at age 64.

The beneficiary would be required to take RMDs at age 72, by which time the funds would have grown to over $640,000 if the funds compounded at 1.5%. Importantly, these distributions are not taxable because tax was paid at the time of conversion.

As you can see, the tax savings to your heirs can be huge in a Roth-conversion scenario. Also, with even tiny investment gains of 1.5% compounded annually, the Roth funds can grow significantly, providing a huge boost to your heirs’ own retirement security.


The demise of the stretch IRA has the potential to increase taxes on inherited IRAs and other qualified retirement accounts. These taxes can be a burden to your heirs, or deplete your hard-earned savings faster than originally planned.

For those in the right circumstances, converting to Roth status can protect your children from higher taxes, and give them a nice cushion for their own retirement. Roth conversion has many variables and consequences, so be sure to discuss it with your retirement and tax advisor before making any decisions.

Alliance America can help

Alliance America is an insurance and financial services company. Our financial planners and retirement income certified professionals can assist you in maximizing your retirement resources and help you to achieve your future goals. We have access to an array of products and services, all focused on helping you enjoy the retirement lifestyle you want and deserve. You can request a no-cost, no-obligation consultation by calling (833) 219-6884 today.

A mother reading a book with her daughter

Your legacy is vastly more than an amount of money left to your surviving beneficiaries. Part your legacy can be the example of a life well-lived that’s achieved through proper planning.

A senior couple stressed over tax liabilities

Too many people enter retirement with burdensome mortgages, car payments and credit-card debt that they’ve amassed during their working years. Proper management of these liabilities is fundamental to your current and future financial viability.

A daughter hugging her mother

Financial planning often is motivated by our love for our life partners, children, family members and friends.

Using a calculator to calculate taxes

Taxes have a significant impact your finances and can siphon assets unless you have a prudent approach to meet your objectives.