Question:
We are thinking of converting our IRAs to Roth IRAs. We are both 66 and will wait to collect Social Security at age 70. We have to take minimum distributions at 70½. At that point, our income will jump and move us into a higher tax bracket. We don’t need the IRA money for income; we just want to pass it down to our three children. Does it make sense to start converting our IRAs to Roth IRAs even with the big tax hit we will take during the conversion?
Answer:
Unfortunately, there is no one-size-fits-all answer. We have to assume you have other income sources to pay for your living expenses. In this case, your mandatory withdrawals from your IRA will be taxable income to you. You’ll likely reinvest the distributed funds in a brokerage account.
Converting the funds to a Roth IRA will help you avoid the mandatory withdrawals. The good news is the conversion doesn’t need to be all at once. You can spread the conversion over as many years as you want. With some tax planning, you should be able to convert an amount that would take you to the upper limit of your current tax bracket without pushing you into a higher bracket. While you will increase your taxes now, you should lower them in the future by avoiding the RMD.
You have to take a long-term view of your plan. Your heirs will inherit either your IRA or your Roth IRA. Your heirs will be required to take required minimum distributions over their lifetime, but with a traditional IRA, the distributions will be taxed at your heirs’ normal income tax rate while Roth distributions will be tax free.
We highly recommend consulting a tax adviser or financial planner before you make any conversions, as there are rules to how you must convert the IRA funds and how you must calculate the tax due. If your IRA is a pre-tax account, you simply pay the tax on the amount converted. It becomes more complicated if your IRA is a mix of pre-tax funds and nondeductible contributions. You cannot pick and choose which funds to convert. Instead, the amount you convert is deemed to consist of a pro rata portion of the taxable and nontaxable dollars in the IRA.
At Henssler Financial we believe you should Live Ready, and that includes understanding the tax consequences of converting your IRA to a Roth IRA. If you have questions regarding your tax situation the experts at Henssler Financial will be glad to help. You may call us at 770-429-9166 or email at experts@henssler.com.
Disclosures
This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
