IRA to Roth -who is elgible and is it advisable
we have a client that is in higher tax bracket . His income is in $300,000 bracket. my questions are :
1- could we tell him he can covert?
2-He is 60 yrs old. does age matter?
3-He has $130,000 in an IRA and wants to convert to Roth IRA. should he do that?
4- How can we direct him to the calculation of how much he can convert? is there a calculation required.?
Permalink Submitted by Alan Spross on Wed, 2011-06-15 21:37
Anyone owning a TIRA can convert at any age they choose. The only limitation now is at that there is a waiting period to reconvert assets if client previously recharacterized an earlier conversion.
That primary factor in determining whether to convert is the tax rate paid for the conversion vrs the expected marginal tax rate in retirement. Conversion is attractive when the retirement rate is estimated to be higher than the present conversion rate and if the client has no Roth assets at all or small amounts, it is also attractive if the rate will be about the same because the first Roth assets are more valuable than progressively additional Roth assets.
However, an IRA of 130k that is fully pre tax (no non deductible contributions included) will almost surely inflate the current marginal rate if the entire amount is converted in a single year. Client should determine where he is likely to fall for this year’s combined state and federal marginal tax brackets. But at age 60 his retirement rate will largely depend on how much he has in total retirement and non retirement accounts because if he has not saved much, he could be in a lower bracket in retirement and should not convert at this time.
His entire financial situation needs to be reviewed to make this decision including the chance that his tax rates may well go up in 2013 if he will still be in brackets above the 25% bracket.