A Roth IRA conversion is something that working-age individuals typically consider more often than those who have reached retirement age. However, if several conditions are met, a Roth conversion can yield powerful benefits for those seeking to smooth out their tax rate during retirement. The AICPA’s, The Tax Advisor published a piece that details the potential benefits that can result from a Roth conversion in retirement. Here’s what you should know.
A Roth IRA conversion at retirement age may make sense for someone who’s planning to retire at the full retirement age of 66 or 67 but who’s delaying Social Security payments until age 70 in order to take full advantage of the 8% annual increase in benefits. Since Roth IRAs do not come with required minimum distributions at age 70.5 like a traditional IRA, having a source of tax-free income can help retirement funds last longer by smoothing out tax rates. In addition, funds withdrawn from a Roth IRA aren’t included as income for the purpose of calculating taxable Social Security benefits when calculating net investment income or modified adjusted gross income for the 3.8% net investment income tax.
Some attractive benefits come with a Roth conversion. However, someone considering it must be able to meet several important preconditions. Funds are not able to be withdrawn from a converted Roth IRA for five years after the initial conversion. So those considering this must be certain they will not need access to these funds during that time. A Roth conversion will generate a one-time tax bill as all of the previously tax-free contributions and the subsequent earnings are taxed at the time of conversion. Funds outside of these retirement savings must be available to cover the tax bill. The final condition to evaluate is your projected future tax rate. If it will be the same or higher than your current one, converting to a Roth IRA now may make sense.
A Roth conversion, even at retirement-age, can offer some individuals a reliable stream of tax-free income and can significantly reduce a individual’s tax burden. As with all tax-related questions, everyone’s situation is different. If you think a Roth conversion may make sense for you, schedule a time to talk with your CPA.