06 Jul Does it make sense to convert my IRA to a Roth?

Q. I am trying to figure out if it makes sense for me to convert my traditional IRA, worth about $27,000, to a Roth or to roll it into my deferred compensation plan. I am retired, age 62 and have a decent state pension plus Social Security. I won’t touch my deferred compensation plan until I have to take mandatory minimums and we max out our Roth each year. My husband contributes the max to his 401(k) each year with four years to go until retirement.
— Contemplating

A. Roth IRA conversions have been a hot topic lately.

There are several consequences to consider, so you need to review a few key points.

Start with your current income tax bracket and compare this with what it potentially may be in the future, said Michael Gibney, a certified financial planner with Modera Wealth Management in Westwood.

He said it makes more sense to do the Roth conversion when you are in a relatively low current tax bracket with the understanding that a full conversion would add $27,000 to the income you already receive.

“In my experience, it makes sense to do this when both spouses are retired — and therefore in a low tax bracket — and before the age where required minimum distributions kick in, which is currently age 72,” Gibney said. “Another consideration for you is the fact that you are one of the lucky ones who is receiving a pension.

So your tax bracket may not be much lower in retirement.”

If that’s the case, another consideration is what future tax rates may be, Gibney said. If you believe tax rates will be higher in the future, then you need to run an analysis on the income tax paid now by doing a conversion and what your future tax burden may be.

Also remember that a higher income level could mean higher Medicare premiums.

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This story was originally published on July 6, 2021.

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