Converting Traditional Ira To Roth Ira After Retirement


What Is The Deadline For Contributing To A Roth Ira

What You Should Know About ROTH IRA Conversions After Age 50 for Retirement

The deadline for contributing to a Roth or traditional IRA is generally the same as the income tax filing deadline. You have until , to make a 2021 IRA contribution. If you want to make a prior-year IRA contribution, specify the year to ensure your IRA provider applies the contribution to the intended year.

Why A Roth Conversion Can Be A Smart Retirement Strategy

There are many options when it comes to retirement, and it can be hard to know which is right for you. One of those options a ROTH IRA conversion, can be a great strategy for some people.

First, a quick refresher on how a ROTH IRA differs from a Traditional IRA.

With a Traditional IRA:

1. You receive an upfront tax deduction on your annual contributions

2. Growth is tax-deferred growth until its withdrawn

3. Withdrawals are taxable as ordinary income

4. There are penalties if you take withdrawals before the age of 59 ½

5. You have required minimum distributions that begin at age 70 ½


1. Your contributions are front loaded meaning you use after-tax dollars for your contributions

2. Growth is tax-free

3. Withdrawals are never taxed

4. Earnings can be taken income-tax-free if you are at least 59 ½ and have had the ROTH IRA for at least 5 years

5. There are no required minimum distributions ever!

If you currently have a Traditional IRA, but some of the benefits of a ROTH IRA sound appealing to you, there is a way to convert your traditional IRA into a ROTH IRA this is whats meant by a ROTH conversion.

In making a conversion, keep in mind that you can convert a portion or all of your traditional IRA into a ROTH and enjoy tax-free withdrawals after retirement. However, a conversion might not be for everyone. When you consider a conversion you should consider the following:

1. Your current tax bracket vs. your future tax bracket

2. Your time horizon

Advantages Of Converting To A Roth

You can benefit from a Roth conversion by paying taxes now at a lower rate if your tax rate is likely to be higher when you take distributions. The strategy should be considered in a number of situations, if you are able to pay the taxes :

  • Your current income is unusually low.

  • You plan to leave the assets to heirs whose tax rates will be higher than yours.

  • Your assets are primarily in tax-deferred accounts and you want more tax flexibility.

  • You want more opportunity to optimize asset locationholding different types of assets in different accounts.

  • You want a hedge against higher statutory tax rates.

  • You wont need your RMDs for retirement expenses. As we will discuss further, even if your tax rate stays flat or decreases in retirement , a Roth conversion could be beneficial if you pay the taxes from an account that isnt highly tax-efficient.

– Roger Young, CFP®, Senior Financial Planner

– Roger Young, CFP®, Senior Financial Planner

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Bumping Up Against Net Investment Income Thresholds

In addition, there are several other factors that could make focused conversion even more attractive. For example, qualified distributions from a Roth IRA are not counted for purposes of figuring the taxation of Social Security benefits, which might be an important additional benefit for those with lower incomes than Joyce. For those with higher incomes, this strategy may help keep income levels below certain thresholds, which could reduce Medicare premiums and/or the 3.8% Medicare surcharge . Finally, Roth IRAs aren’t subject to RMDs during the original owner’s lifetime, so Roth conversion may also help investors avoid taking IRA withdrawals that they don’t need.

3.8% Medicare surcharge threshold amounts

Tax filing status

Past performance is no guarantee of future results.

The CFP® certification is offered by the Certified Financial Planner Board of Standards Inc. . To obtain the CFP® certification, candidates must pass the comprehensive CFP® Certification examination, pass the CFP® Board’s fitness standards for candidates and registrants, agree to abide by the CFP Board’s Code of Ethics and Professional Responsibility, and have at least 3 years of qualifying work experience, among other requirements. The CFP Board owns the certification mark CFP® in the U.S.

Diversification and asset allocation do not ensure a profit or guarantee against loss.

Fidelity Brokerage Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI 02917

Is My Ira Contribution Deductible On My Tax Return

Why It May Pay To Convert to a Roth IRA

If neither you nor your spouse is covered by a retirement plan at work, your deduction is allowed in full.

For contributions to a traditional IRA, the amount you can deduct may be limited if you or your spouse is covered by a retirement plan at work and your income exceeds certain levels.

Roth IRA contributions aren’t deductible.

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About The Author: Robert Klein

Robert Klein, CPA, PFS, CFP®, RICP®, CLTC® is the founder and president of Retirement Income Center in Newport Beach, California. Bob is also the writer and publisher of Retirement Income Visions, a blog featuring innovative strategies for creating and optimizing retirement income that Bob created in 2009.

Bob applies his unique background, experience, expertise, and specialization in tax-sensitive retirement income planning strategies to optimize the longevity of his clients after-tax retirement income and assets. He does this as an independent financial advisor using customized holistic planning solutions based on each clients needs and personality.

Retirement Income Center has established relationships with various highly respected professional organizations and platforms to provide the firms clients with its comprehensive array of fee-based planning, management, and protection services.

Roth Ira Conversion Surcharge After Age 62

Although timely Roth IRA conversions can be used to decrease Medicare Part B and D premiums and increase after-tax income throughout retirement, theres a potential price to pay if the conversions occur after age 62. You and your spouse, if married, will pay higher Medicare Part B and D monthly premiums two years after the year of the conversions if the taxable amount of your conversions causes you to jump into a higher Medicare income bracket.

As an example, suppose John and Mary, age 64 and 63, respectively, are married and their 2018 modified adjusted gross income, or MAGI, is $228,000 prior to doing any Roth IRA conversions. Lets assume that John and Mary do conversions of $23,000 and $22,000, respectively, for a total of $45,000.

Fast forward two years to 2020 when John and Mary are 66 and 65, respectively, and are both on Medicare Part B. Using John and Marys 2018 MAGI of $228,000 prior to their Roth IRA conversions of $45,000, their monthly Medicare Part B premiums would be $289.20 each. They would pay a total of $3,470.40 each for the year, or $6,940.80 for both.

John and Marys actual 2018 MAGI is $228,000 increased by their taxable Roth IRA conversions of $45,000, or $273,000. This causes John and Mary to jump into the $272,001 – $326,000 Medicare income bracket, increasing their monthly Part B premiums from $289.20 to 376.00 each.

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Roth Ira Withdrawal Rules

To get the full tax benefit from a Roth IRA, youll need to follow some rules. To withdraw any of your accounts earnings tax free, you must have had a Roth IRA account open for at least five years. You must also be at least 59½, or you will face an additional 10% early withdrawal penalty.

There are several exceptions to the early withdrawal penalty, however. For example, it is waived if you become disabled, regardless of your age at the time. You can also withdraw up to $10,000 to buy, build, or rebuild a first home for yourself, a child, or a grandchild.

Youll Face A Big Tax Bill Now

ROTH IRA: The Best Age to Convert IRA to ROTH IRA

Depending on how much you convert, your tax bill could be substantial, and the money to pay it will have to come from somewhere. If you plan to cover the taxes by withdrawing extra money from your traditional IRA, you generally will be subject to a 10% early withdrawal penalty if youre under age 59½.

Even if you arent penalized, you still will be reducing your retirement savings to pay the taxes. Taking the money from non-retirement accounts is a better idea, but not a perfect one. By giving it to the Internal Revenue Service now, youll be sacrificing whatever it might have earned if you had kept it invested.

If you do a conversion, you should be able to pay the taxes with an outside source, says Morris Armstrong, founder of Armstrong Financial Strategies in Cheshire, Conn. Otherwise, the math does not favor the conversion. Always remember that you are not converting in a vacuum and the total picture needs to be evaluated.

  • Even though youll owe tax on the converted amount, you might save on taxes in the long run.

  • There are no required minimum distributions during your lifetime.

  • You can withdraw your contributions at any time.

  • You owe tax on the converted amountand it could be substantial.

  • You may not benefit if your future tax bracket is lower than it is now.

  • You must wait five years to take tax-free withdrawals, even if youre already age 59½ or older.

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S To Convert A Traditional Ira To A Roth Ira

Here are the three steps to convert your traditional IRA to a Roth IRA:

  • Determine if you are eligible to make the conversion. There are income levels you must follow to determine if you can open a Roth IRA account. For 2022, if you file taxes as either single or head of household, you can make up to a modified adjusted gross income of $129,000 for a contribution. The income level allows you a partial deduction up to $144,000 where it phases out completely. If you are married filing jointly or a qualified widower, the income level is $204,000 to $214,000. If you are married filing separately, you can make a partial contribution if you make less than $10,000 and no contribution if you make over that amount.
  • . You dont have to convert every dollar in your traditional IRA to a Roth IRA. You can do a partial conversion. There are issues to consider. Only convert as much as you are prepared to pay taxes on, both your contributions and earnings. If you think you will be in higher tax brackets in the coming years, try to convert as much as possible this year. You can only do one Roth conversion in a tax year. If you are still fairly young you may have time to convert part of your traditional IRA each year for a few years. However, you have to also remember the five-year rule or vesting requirement.
  • Arcane Rules On Intra

    There are a few more wrinkles in this. First, all conversions from a workplace plan are considered distributions. As distributions, they are still subject to the pro-rata rule discussed ad nauseum above. Moreover, if you withhold tax from the converted amount and are not yet 59.5 years old, then the taxes withheld will be counted as an early distribution subject to the 10% penalty just as they would be for a Roth IRA.

    Whats unique about conversions within a plan and not out to a Roth IRA, is that the IRA aggregation rules do not apply. This means that if you have three 401s totaling $500,000 and 401 number three has $100,000 of all after tax money, you could convert just 401 number three and effectively complete a tax-free Roth Conversion. Why? Because you can disregard the other $400,000 held in those other pre-tax 401s when completing this conversion! Aggregation rules hold no sway here. It works the same way for a 403 or a 457.

    Remember though, for this to be possible your plan must allow for designated Roth accounts, after-tax contributions, and in-plan conversions. While these features are becoming more and more common we still see quite a few plans out there that dont offer all of these. Or more strangely, offer just some of these or offer them with restrictions.

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    Understanding Backdoor Roth Iras

    A Roth IRA allows taxpayers to set aside a few thousand dollars from their earnings every year in a retirement savings account. The contributed money is after-tax dollars. That is, the funds are earnings that have been taxed in the year when they are contributed to the Roth IRA.

    A Roth IRA differs from a traditional IRA. The traditional IRA gives the earner an immediate tax break because taxpayers can take a tax deduction for their contributions in the year when they are made and no taxes are due until the money is withdrawn. When withdrawals are made, usually after the retirement, the account holder will owe taxes on both the dollars invested and their earnings.

    In some cases, taxpayers whose high incomes or coverage by an employer retirement plan make them ineligible to deduct IRA contributions instead contribute after-tax funds to an IRA.

    The problem for high-income taxpayers is that individuals who earn above a certain amount arent allowed to open or fund Roth IRAsunder the regular rules, anyway. If your modified adjusted gross income exceeds statutory ceilings, set in the low six figures, then the law starts phasing out the amount that you can contribute. Once your annual income exceeds a specified threshold, you cannot participate at all.

    Can I Take A Tax

    Roth IRA Conversions

    In general, you are able at any time to take a tax-free distribution of funds that youve contributed to a Roth individual retirement account . However, if the funds are in your Roth IRA due to a conversion from a traditional IRA, you must wait five years before you can take a penalty-free distribution of your contributed funds.

    Because you paid taxes at the time of conversion, the distribution qualifies as tax free. However, anything distributed within five years of a conversion is subject to a 10% early distribution penalty. This five-year rule applies to every conversion, individually.

    There is a reason for this exception to the tax- and penalty-free rule. The Internal Revenue Service realized that taxpayers could use the Roth IRA conversion as a loophole to take early distributions penalty free. For example, lets assume a taxpayer has $50,000 in their traditional IRA. They could convert the funds to a Roth IRA, pay the required taxes, and take the funds out of the Roth IRA the next day. To close this loophole, the IRS set a special rule about funds from Roth IRA conversions. You cant withdraw funds within five years of a conversion without paying the 10% early distribution penalty.

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    Who Should Not Consider Converting To A Roth Ira

    For some people, sticking with a traditional IRA or other tax-deferred accounts might be a better strategy. A Roth conversion might not be the best option in the following situations:

    • Youre nearing, or in retirement and you need your traditional IRA to cover your living expenses. In this situation, if you convert savings in an IRA to a Roth IRA but may need to spend that money soon, your assets may not have time to recoup from the taxes you would have to pay.
    • Youre currently receiving Social Security or Medicare benefits. If a Roth conversion were to increase your taxable income, then more of your Social Security benefits would be taxed and your Medicare costs could rise.
    • You dont have money in your taxable account to pay the conversion tax. Preferably your taxable account has assets with a high basis or no gains that need to be taxed. If you have to pay tax due on the withdrawals to fund the conversion with savings from your IRA, it would take even longer to recoup the tax loss and may negate the benefits.
    • You plan on giving a substantial amount of your traditional IRA to charities. You could do this by utilizing a Qualified Charitable Distribution to meet your RMD requirements. If you dont plan on using your IRA assets yourself or passing them on to heirs, then a QCD could minimize or reduce the tax impact of RMDs. In this case, converting to a Roth IRA could be counterproductive, since you wouldnt avoid taxes as you would with just a QCD.

    How To Convert A Traditional Ira To A Roth Ira

    Converting all or part of a traditional IRA to a Roth IRA is a fairly straightforward process. The IRS describes three ways to go about it:

  • A rollover, in which you take a distribution from your traditional IRA in the form of a check and deposit that money in a Roth account within 60 days
  • A trustee-to-trustee transfer, in which you direct the financial institution that holds your traditional IRA to transfer the money to your Roth account at another financial institution
  • A same-trustee transfer, in which you tell the financial institution that holds your traditional IRA to transfer the money into a Roth account at that same institution
  • Of these three methods, the two types of transfers are likely to be the most foolproof. If you take a rollover and, for whatever reason, don’t deposit the money within the required 60 days, you could be subject to regular income taxes on that amount plus a 10% penalty. The 10% penalty tax doesn’t apply if you are over age 59½.

    Whatever method you use, you will need to report the conversion to the IRS using Form 8606: Nondeductible IRAs when you file your income taxes for the year.

    If the value of your retirement account has dropped, that could be a good time to convert to a Roth IRA because the tax impact will be less onerous than when your account is worth more.

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