Convert Traditional IRA to Roth IRA
I am 68 years old. I have $240,000 in a traditional Ira. I am in the 15% tax bracket. My understanding is that I can convert to a Roth Ira and owe $36,000 in tax (240,000 x .15) that would could be spread over 2 years (2011 & 2012) I.E. $18,000 tax in each year. I can afford to pay the tax with funds other than the IRA. Also, I understand with the Roth IRA I would not be subject to the RMD when I become 70.
Is all of the above correct and if so, would it make sense for me to convert.
Thank You
Permalink Submitted by Alan Spross on Tue, 2010-01-19 18:41
The problem here is that when adding 120,000 to your income in 2011 and 2012, you will no longer be in the 15% bracket plus whatever your state rate may be. Therefore, it is likely that you would convert far less than the total amount in the IRA, an amount low enough so that you would not exceed the top of your 15% bracket.
While conversion recommendations require a very thorough analysis of your entire financial picture, it sounds like much smaller converted amounts would be appropriate for you, IF you should convert at all. It would not be wise to incur the higher taxes on conversions just simply to avoid RMDs. Your RMDs start at less than 4% of your TIRA balance, so would be around 9,000 at age 70.5.
Part of the complexity in determining the amount to convert is the affect on taxation of your SS benefits, both in the conversion year and the savings after conversion. This is a fairly complex analysis that you could do with tax software, or have a tax pro run certain scenarios for you.
If 240,000 is all you have in retirement accounts, and do not have a large pension or other savings, it is very possible that you should not convert at all.
You are corrrect that a Roth IRA is not subject to RMDs unless it is inherited by a non spouse beneficiary.
Permalink Submitted by Marvin Rotenberg on Tue, 2010-01-19 18:49
You are basically correct. The only exception is you would spread the conversion amount over 2011 & 2012. The income tax due would be based on your income in 2011 & 2012. You are not simply paying the income tax over two years, you are spreading the income over two years.
Marvin
Permalink Submitted by Gerald Rahm on Mon, 2010-01-25 23:03
If I decide to convert my traditional ira to a roth, should I do it as soon as possible or can I do it anytime in 2010. I want to fully explore my options and make sure I make the right decision. If I take several months to decide, will that in its self be a bad decision?
Thanks
Permalink Submitted by Alan Spross on Mon, 2010-01-25 23:41
You can do your 2010 conversion any time this year. The timing of your conversion in a given year is a factor only with respect to how your investments do over the period of time. If the market rises all year from here, your gains on a current conversion would occur in your Roth IRA. However, if you postponed the conversion until fall, those gains would be in your traditional IRA and you would either pay taxes on those gains or be able to convert a lower portion of your traditional IRA.
However, if the markets fall from here, then you would have been better off by waiting. Most advisors would probably recommend converting sooner because the market rises more often than it falls on average. However, it is also obvious that the stock market has not risen more often in the last decade. If your Roth is invested in bonds held to maturity or CDs, then there would be no losses and small gains so there would be a slight advantage to converting earlier.
Note that since you can recharacterize (reverse) a conversion up until October 2011, it takes some of the pressure off your decision if things do not work as planned. Another way to hedge this decision would be to convert half your amount now and the other half later. These are separate conversions and you could reverse all or part of either of them or none of them. If you do this, I suggest having each conversion done to a different Roth IRA account because that makes the recharacterization much easier to understand and process. You could then re combine them in a couple years after the recharacterization deadline has passed.