Should I Convert My IRA to a Roth?
Category: Estate Planning
November 30, 2021 — It is amazing how many times this question comes up, usually from people who we consider very proactive about their retirements. There are no easy answers to the question, but there are some guidelines. Adding to the mix, if the provision of the Build Back Better plan concerning Roth conversions is included in any final bill that gets congressional approval, there might never be a better time to consider it than right now.
The legislation being considered would prohibit the conversion of after-tax assets from traditional IRAs and employer-sponsored retirement plans into Roth accounts after December 31, 2021. No one knows what will happen in congress these days. But, if you think that law has a chance of passing, this could be your last chance to convert.
What is a Roth IRA?
Basically, in a Roth IRA you contribute after-tax income into a tax friendly retirement account. The money you contribute and future income and gains are shielded from future taxation. Unlike regular IRAs, you don’t have to withdraw anything from it during your lifetime. And if you do, you won’t pay taxes on those withdrawals. The SECURE Act changed the law on how long a period your heirs (except spouses, minor children, etc.) have to withdraw the money – it now has to be completed over 10 years. Unlike contributions to a regular IRA or employer-sponsored retirement plan, you cannot deduct the initial contribution from your current income.
Comments on "Should I Convert My IRA to a Roth?"
JimH says:
Another point to consider in addition to limiting a conversion that doesn't change your tax bracket by too much, also consider what impact your conversion will have on your Medicare Part B and Part D premiums. Medicare assesses an Income Related Monthly Adjustment Amount (IRMAA) based on your MAGI (Modified Adjusted Gross Income). The MAGI is based on a 2 year look back....for example, the premium you paid in 2021 is based on your 2019 MAGI. So, take a close look at both the tax tables and the medicare premiums table to hit the sweet spot for determining how much to convert in a given tax year. I didn't and now I'm paying the price....two years!!!
Admin says:
Here is another question I would love to hear people's opinion about. I am 75 years old and have most of my retirement money in IRAs and 401(k)s. Somewhat less in Roths. My RMDs are driving up my income tax bracket, so I am wondering which is the optimum bucket to take money out of to live on - IRA/401(k)s (which is taxable as it comes out), or Roths (not taxable). Any thoughts about that?
LS says:
Assuming your IRA and 401k accounts are pre-tax, you don't have much in the way of options. You must satisfy the RMD requirements each year. Taking funds from your Roth account wouldn't help you with the RMDs. I suppose you could take a large distribution from one or more of the pre-tax accounts and take the tax hit in one year. That would lower your RMD amount in subsequent years. I think it would be best to seek the help of a financial advisor or accountant on your withdrawal strategy.
Admin says:
Thanks LS, that is some helpful advice. Good point, until I satisfy my RMDs taking money out of the Roths doesnt make sense. Agreed, my tax advisor needs to weigh in. A few years ago I took some extra money out of the IRAs and converted it to a Roth. But I had to pay taxes on it and then our Part B Medicare premiums went way up. Looks like an ideal situation would be to wait for a low income year or one with a lot of tax losses, and convert some that way. Meanwhile I ran across this helpful article which Compares an AI response with that of some experts. https://smartasset.com/retiremtopent/12-million-ira-120k-to-roth?utm_source=flipboard&utm_content=topic/retirement
Admin says:
Sorry folks, we made an error when we pasted in the link to a related article to The Street from the Daily Alert today. The correct link is https://www.thestreet.com/retirement-daily/retirement-research/how-to-make-tax-efficient-withdrawals-from-your-retirement-account?