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I’m 60 and I’d like to convert some money from my regular IRA to a Roth. I am aware that the income carries a five-year penalty, but I will not need that money until I am at least 70 years old. Is it advisable to do this? My annual income from a pension is $65,000 and I have $100,000 in my IRA.
– Tomas
Yes, a Roth conversion is worth considering and could very well be worth it. I’ll discuss some of the key points you may want to consider when considering whether or not to convert.
But before we get into it, a side note about your comment about waiting five years: There are three different five-year Roth IRA rules, and two of them often get mixed up and cause a lot of confusion.
Because you are over age 59½, you are not subject to the 10% early withdrawal penalty associated with distributions taken less than five years after a Roth conversion. However, if this is your first Roth IRA, you will have to wait five years before you can withdraw your earnings tax-free. (And if you have similar questions about Roth conversions or other retirement planning topics, talk to a financial advisor.)
A Roth conversion can be a wise strategic maneuver for retirement income planning.
Saving money on taxes is the main reason to do a Roth conversion. In your situation, I think there are a number of reasons why a Roth conversion could help with your tax liability.
First, you’re in a fairly low tax bracket to begin with. If you have no income other than your stated pension, you can reasonably assume that you are in the 22% marginal tax bracket if you are single. Otherwise, you may fall into the 12% tax bracket if you are married and filing jointly with your spouse.
Because your income comes from a pension, there is no reason to assume that your nominal income will decrease in the future. This means that, apart from small annual adjustments to tax brackets over time, you shouldn’t expect to move into a lower bracket later on.
However, keep in mind that the provisions of the Tax Cuts and Jobs Act will expire at the end of 2025. Unless Congress extends it or enacts another broad tax cut, income tax rates will go up and standard deductions will go back down.
It may make sense to gradually supplement your current bracket with Roth conversions over a few years. Of course, also take into account your state income taxes or if you plan to move to a state where there is no income tax. (But if you need more help creating a retirement income plan or optimizing your tax strategy in retirement, consider working with a financial advisor.)
Presumably you will also start receiving Social Security benefits at some point. I’m not sure what your plan is for that, but those payments could start as early as age 62 or as late as age 70.
The amount of your social security benefit that is taxable partly depends on your other income. The formula is somewhat complicated, but the general idea is that the higher your income, the more of your Social Security benefit is subject to taxes. You may pay taxes on up to 85% of your social security.
Also keep in mind that taxable withdrawals from traditional IRAs are included in that formula. Qualified withdrawals from Roth IRAs are not.
This is where Roth conversions can really help. First, converting money from your traditional IRA to a Roth IRA will increase your taxable income for the year, but it won’t affect how much of your Social Security benefits are subject to taxes since you haven’t started collecting them yet.
Then, once you start receiving Social Security, the tax-free withdrawals from your Roth IRA will not increase your taxable income, and in turn, how much of your benefits are taxable. (Talk to a financial advisor if you need additional help planning for Social Security and retirement taxes.)
A 60-year-old man is considering converting his traditional IRA to a Roth IRA.
Another main reason some people find Roth conversions useful is that they give you more control over when to withdraw your money. You must take minimum distributions (RMDs) from your traditional IRA, but not from a Roth IRA. This gives you more flexibility to plan your own distributions, both in terms of timing and the amount you take.
For example, maybe your $65,000 per year pension is all you need to live on. If you have to withdraw a full RMD from your traditional IRA, your tax liability for the year will increase and you could potentially move up to the next tax bracket. By converting your entire IRA (or part of it) to a Roth IRA, you eliminate or reduce any RMDs you may have and maintain more control over your taxable income.
In this scenario, it may make sense to do a series of gradual Roth conversions over the next few years. If you’re single, you can convert enough to bring your taxable income to $100,525 in 2024, meaning you’re “padding” the 22% bracket. Likewise, if you’re married and filing jointly, you can convert just enough to keep your taxable income under $94,300 and within the 12% tax bracket.
(And if you need help with this kind of planning, use this free tool to connect with fiduciary advisors.)
If I were in your shoes, I’d take a deeper look at Roth conversions. I think you might be in a good place for them. You are probably in a fairly low tax bracket based on your income and the current income tax environment. You may be able to save taxes and gain more control over your distributions over time by making several Roth conversions.
Before you decide to hire a financial advisor, do your due diligence and speak to several potential candidates. Ask about their fee structures, services, typical clients and whether they earn commissions for making certain recommendations. For an in-depth look at how to find and choose a financial advisor, read this comprehensive article.
A financial advisor can help you with a Roth conversion, and finding a financial advisor doesn’t have to be difficult. SmartAsset’s free tool matches you with up to three vetted financial advisors serving your area, and you can have a free introductory meeting with your advisors to decide which one you think is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Are you a financial advisor looking to grow your business? SmartAsset AMP helps advisors connect with leads and provides marketing automation solutions so you can spend more time making conversions. Learn more about SmartAsset AMP.
Brandon Renfro, CFP®, is a financial planning columnist at SmartAsset, answering reader questions about personal finance and tax topics. Do you have a question that you would like answered? Email AskAnAdvisor@smartasset.com and your question may be answered in a future column. Questions may be edited for clarity or length.
Please note that Brandon is not a participant in the SmartAsset AMP platform, nor an employee of SmartAsset, and has received compensation for this article. Questions may be edited for clarity or length.
The post Ask an Advisor: I’m 60 and have $65,000 in retirement income and $100,000 in my IRA. Is a Roth Conversion Worth It? first appeared on SmartReads by SmartAsset.
