15 Sep Is my plan to convert my IRA to a Roth a good strategy?

Q. I rolled over my 403(b), 457 and Roth accounts from an old employer to my current employer 15 years ago. The 403(b) and 457 are now in an IRA. I would like to start rolling over some of the money, $10,000 a year, from this IRA into a Roth. Can I use the Roth I already have? When I retire in five years, my pension and Social Security will keep me in a high tax bracket. I’m concerned about taxes because all of my accounts are pre-tax. I’m 69 years old.
— Retired

A. Let’s review how Roth conversions work and the pros and cons.

As you said, taxes are the key to consider before you make a move.

A conversion can reduce taxes in the future by eliminating the requirement to take annual minimum distributions, said Cynthia Fusillo, a certified public accountant with Peapack Private Wealth Management in New Providence.

For you, a conversion sounds attractive to you given that you anticipate being in a high tax bracket, even in retirement, she said.

Traditional IRA owners must begin taking annual withdrawals, based on actuarial life expectancy tables, at age 72. Failure to do so subjects the IRA owner to penalties of 50% of the shortfall, Fusillo said. Roth IRAs are attractive in large part because there is no such minimum withdrawal requirement.

“Your Roth earnings continue to grow tax-free, just like in a traditional IRA, and this is also attractive for those whose desire it is to leave all or part of their IRA money to heirs,” she said.

On the con side of converting, you will need to come up with funds to pay the taxes today so it’s important to assess how much that will be and that you have a pool of non-IRA money to pay the conversion tax, Fusillo said.

“Since there is a tax associated with converting, oftentimes taxpayers will look for a year when they will be in a lower tax bracket,” she said. “For younger taxpayers, converting to a Roth restricts when earnings can be withdrawn — usually not for five years— prior to age 59 ½.”

You can certainly withdraw $10,000 annually as you’ve asked and convert that each year into your existing Roth account, Fusillo said.

“Without knowing the size of your traditional IRA, it’s difficult to know if you’ll accomplish your goal of trying to minimize income in retirement at this level of conversion, meaning you may still be left with a sizable balance in your traditional IRA by the time you reach 72,” she said. “But you’re certainly able to convert as much as you’d like as long as you’re prepared for the associated tax.”

These rules can be complex so we recommend you consult with your tax advisor before making a decision.

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This story was originally published on Sept. 15, 2021.

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