01 Nov Can I convert my savings to a Roth IRA?

Q. I’m thinking of converting most of my $70,000 into an IRA and then into a Roth IRA. Is that possible? I’m 77 and still working full time, and planning to retire in about five years… if I make it.
— Longevity man

A. For starters, we certainly hope you make it!

Now, you didn’t say what kind of account the $70,000 is in.

If it’s in a qualified retirement plan such as a 401(k), then yes, you can roll it over into an IRA, said Jeanne Kane, a financial planner with JFL Total Wealth Management in Boonton.

Then, you can convert the IRA into a Roth IRA.

If the funds are in a taxable account, then you can’t do it, she said.

Kane said Roth conversions are not straightforward, so it is important to understand the implications before you do one. Determining whether to convert and how much to convert depends upon a few items.

First, ask yourself if your income tax rate be higher or lower when you retire.

“If your income will be in the same or higher tax bracket, it may make sense to do a Roth conversion but if your income will be in a lower tax bracket, it may not,” she said.

Also, you don’t want to pay taxes now on money that would be taxed at a lower rate later.

“While I know that we all need to pay our fair share of taxes, I’m not a fan of paying more than I should,” she said.

Next, ask yourself if the amount you convert bump you into a higher tax bracket this year or in the year you make the conversation.

Kane said if you convert, you want to be able to stay in the same bracket you’re. If you convert too much, you may end up paying taxes at a higher rate.

“Rather than converting your entire IRA at one time, try doing a series of Roth conversions over a period of time,” she said. “This way you’ll be able to better manage the tax impact.”

Then consider if you can afford to pay the taxes from money outside the IRA. Kane recommends you do not pay the tax bill from the IRA proceeds.

”If you must use funds from your traditional IRA in order to pay the taxes, then it will cost you to convert to a Roth and you’re better off letting the funds sit tight,” she said.

Also note the IRA five-year rule for Roth conversions won’t apply to you because you are over 59 ½, she said.

Roth conversions can be tricky so you should consider speaking with a qualified financial professional.

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This story was originally published on Nov. 1, 2019.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.