Should I make a $50,000 conversion from a traditional IRA to a Roth?
I am planning to make a partial conversion this year from a traditional IRA to a Roth IRA. I know conversions are generally not recommended for someone of my age (76), but I have looked at the IRS table for determining RMD's when I am in my 80's and the RMD's will go up sharply. I want to do a small conversation this year and if I like the result, continue with partial conversions in future years. When discussing conversions, I never hear anyone mention those RDM factors used for those in their 80's. What do you think of this idea?
I like your spirit of continuing learning. It’s not unusual, in terms of age, to do a Roth conversion if it benefits you taxwise. On the other hand, I’m not sure about what you meant your “RMD will go up sharply” as the factor for age 80 declines to 10.2 vs 12.7 at 76. Unless you predict a superb market return in 6 years, your account balance decreases gradually each year as you make the withdraw via RMD requirement. Thus, mathematically speaking, your annual withdrawal could be smaller or fairly similar to the previous year.
Lastly, you must meet your annual RMD requirement first before the conversion. In other words, if your 2017 RMD is $30k and you also want to make a $20k Roth conversion, you must take the $30k first to satisfy the RMD requirement, and then take an additional $20k for the Roth conversion. You can’t substitute the $20k conversion as this year’s RMD requirement. Therefore, the total amount of taxable income from the RMD and Roth conversion for 2017 is $50k. If you have any other source of income, such as pension and/or annuity, you must consider if those income will push your income to pass the $170k (MFJ, $85k for Single) for Medicare related surcharges. Consult a CFP® or RICP® to make sure your intention can be carried out properly. Best!
It could be a great idea depending on your future goals and current situation. Here are a few things to think about:
1) What is your view of future tax rates? Will they increase or get lowered? (if Trump gets this way). Depending on your view, it might help to take advantage of current rates or wait for lower ones.
2) Doing the conversion might affect how much of your Social Security will be taxed. Depending on your current income outside of Social Security, you might only have a small portion of your benefit being taxable. Converting to Roth might not only add taxes from the conversion but also have more of your benefit taxed.
3) Your Medicare Part B premiums could go up. Your premiums depend on your income. Converting might push your cost up.
4) Negative effect on compounding gain. By converting, less of your money will be invested in the markets. If we see gains in the near future, it could mean that you might participate less in them.
Although, I like the fact that you are trying to plan your future tax liability. There are a lot of things to think about when you are deciding on a conversion. Make sure you talk to someone (CPA and/or financial planner) on how this decision will affect you.
I hope this helps.
Avoiding Required Minimum Distributions (RMDs) is a great reason to convert to a Roth IRA. If you have the funds outside of your retirement accounts to pay for the tax obligation, you are in great shape to make the conversion. Of course, additional benefits include tax-free growth and qualfiied withdrawals later, so you do not need to factor in a reduced net gain.
In general, I think converting portions of your traditional IRA to a Roth is a good idea for the reason you mentioned - reducing your future RMD. Assuming your RMD exceeds your financial needs, this can make sense. If you need all or more than your RMD, then converting may not be a good idea. I recommend speaking with your tax professional and your financial advisor. Ideally, they should be working together to help you determine the best solution for your distinct situation.
YES---YES---YES-----but do it as part of a larger, comprehensive, holistic retirement income plan that looks at your:
- Income sources
- Social Security/Pension
- Medicare impact
- Long-Term CAre
- Future tax burden.
What other income do you have? Why $50k? Why not more or less? Are you an accredited investor? Do you have assets of over $1 million? You may be leaving valuable tax deductions on the table that you aren't even aware of and be able to convert much more over with proper integrated planning.
Remember, both Social Security and Medicare are MEANS TESTED--at 76 you've already caught onto the fact that it only gets worse from here. Take 15 minutes and give a investopedia advisor a call and then can outline your options, and show you before and after projections.
Here's to lower lifetime taxes!