Q.: I have about $57,000 in my traditional IRA and about $6,800 in a Roth IRA. I am 68½ now. I feel converting the money into a Roth IRA while in a low tax bracket before I turn 70 would be a good move. That would give me the maximum amount possible in my Roth IRA before I was forced to start withdrawing a portion. I have the money in a savings account to pay taxes.
Is this a good move? Is my thinking correct? I’d love your comments.
Best, Nancy
A.: Thanks for the question, Nancy. The idea of converting while in low bracket year is sound but fear of the required minimum distributions (RMD) may not need to be a strong motivator.
Yes, when RMDs begin they can kick you into a higher tax bracket, but not necessarily. Usually, the first year RMD is roughly 3.7% of the IRA. It rises only to about 5% by the time you are 80. So, if we assume your $57,000 is worth $65,000 in two years (7%-ish growth rate) your RMD would be about $2,400. That is probably not too scary a number.
The more compelling reason to convert would be that you were confident that you would be in a higher tax bracket at 70½ and beyond, or your heirs would be in a higher bracket, than the bracket you are in now. If either is the case, then paying taxes at today’s low rate to avoid paying at tomorrow’s higher rate works well.
Converting probably won’t hurt you — unless you convert and later fall into a lower bracket in the future. If you don’t plan to spend it all, there are other parties to consider.
Who are your heirs? If you leave behind a widower, he may be in a higher bracket because the brackets for single filers differ from married households. If you leave it to, say, your daughter, the surgeon, she may be in a higher bracket. These types of scenarios point to considering a conversion. You pay the tax today at a lower rate than they would pay later.
However, if you are leaving the IRA to charity or a lower income heir, converting may not be wise. You would just be paying taxes now at a higher rate than the beneficiary would face later.
The recent tax code changes put an end to recharacterizations of conversions so be careful about how much you convert. You cannot unwind a conversion made in 2018 or later. If you convert so much as to push you into a higher bracket, you will be stuck with a higher tax bill than you wanted.
If you have a question for Dan, please email him with “MarketWatch Q&A” on the subject line.
Dan Moisand’s comments are for informational purposes only and are not a substitute for personalized advice. Consult your advisor about what is best for you. Some questions are edited for brevity.
