IRA to Roth conversion, does it make sense?

I have read several articles about doing the IRA to Roth conversion and it seems like this is the thing to do. However if all your retirement funds are in IRAs and to do the conversion to Roth you will have to pay the taxes with IRA funds, is this still a good move?



It is not the thing to do unless you have analyzed your own particular situation and find that you can convert for a rate that is lower than or in some cases equal to your expected rate in retirement. Unless you have a considerable pre tax IRA or 401k balance or your taxable income will be rising after age 70.5 due to RMDs, an inheritance etc, you should not be converting unless you are in a very low marginal rate tax year due to retirement or high deductions. What is your situation, working or retired, and age under 59.5 or over?

My wife and I are both retired and will be 65 this year. We are planning to collect SS at 70.  Current numbers look like not all of the RMD will be needed meet our annual requirements, given no major changes. 

You do have an ideal window for conversions prior to 70 since SS benefits have been delayed and RMDs do not start until 70.5. In addition, over the next 5 years tax rates have been reduced making it more likely that you can convert at least some amount at a lower tax rate than you will be paying for the RMDs and taxable SS benefits. Because the largest marginal rate increase is from 12 to 22, taxpayers can often convert up to the top of the 12 % bracket, and perhaps beyond depending on circumstances. If almost all of your liquid assets are in pre tax retirement accounts and you do not have taxable savings to pay the conversion taxes, while it is not ideal you might take additional TIRA distributions to pay the taxes. At least being over 59.5 eliminates any penalty on distributions to pay conversion taxes, but these distributions remove money from your retirement accounts. That said, this is no different than if you drained your cash savings to pay the taxes and had to replenish those savings by taking a TIRA distribution. You would still be paying taxes on money distributed to pay taxes which in turn will increase the amount of tax due, and that is why conversions models assume taxes will be paid with other savings.

While there are other benefits to the Roth conversion, the principal benefit is that if you can pay the tax on the conversion out of other assets, you’re effectively shifting additional wealth into the tax-free Roth environment.

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