Roth IRA conversion – use older Roth IRA account

Submitted by Mike Leffler on Fri, 2017-08-18 18:25

This may be a silly question, but knowing the rationale behind it all would help.

I have a client who is retired, age 67, and pursuing Roth IRA conversions between now and age 70.5 (when RMDs will begin as well as she will begin drawing SS benefits).

She has significant IRA assets which she is beginning to convert to a Roth IRA, but minimal after-tax dollars to pay for the taxes on the conversion.

However, she does have an older Roth IRA account that has had significant growth over the years. If she were to use these Roth IRA dollars to pay taxes for the conversion (of course, keeping her within her tax bracket of 15% and not jumping into the 25% bracket), does this strategy make sense?

It’s obviously counter to only pursue Roth IRA conversions if you have after-tax dollars to pay the taxes along with keeping a client within a certain tax bracket, but wanted to see if there was any merit behind this strategy given that her old Roth IRA account has experienced growth over the years.

Thank you for your help.



Submitted by Alan - IRA critic on Fri, 2017-08-18 20:28

  • All Roth accounts are considered combined for tax purposes, but it sounds like this client made their first Roth contributions more than 5 years ago. If so, their Roth is fully qualified and tax free. If taxes are to be paid from IRA money, it would be easier for the client to simply have taxes withheld from the TIRA conversion distribution. The taxable income is the same, the TIRA is reduced by the same amount and the Roth grows by the same amount which is the amount of the TIRA distribution less the taxes paid. Withholding is also more tax efficient than quarterly estimates.
  • The other question is whether converting when taxes must come from the IRA is as beneficial as the usual recommendation to pay taxes from other funds, which this client does not have.  When taxes are paid from IRA money (either TIRA or Roth) the effective tax rate for the conversion will be higher, ie 17.6% for someone in the 15% bracket because the Roth will only be increased by 85% of the distribution. However, taxable cash which would otherwise have paid the tax bill is preserved.

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