Roth IRA Conversion Inquiries Sought from Editor, August 8th
At age 73, managing your retirement savings can be a complex task, especially when it comes to converting traditional IRAs to Roth IRAs. Here's a breakdown of the key rules and considerations to keep in mind.
Firstly, it's important to note that there is no age limit or income requirement for converting a traditional IRA to a Roth IRA. However, any conversion will be taxed as ordinary income, except for any non-deductible contributions you've made to your traditional IRA[2].
The most critical rule to remember is the RMD (Required Minimum Distribution) rule. Before making any Roth conversions, you must withdraw your total aggregated RMD for the year from all your traditional IRAs[1][3]. RMDs cannot be converted to a Roth IRA; they must be taken as a taxable distribution first.
When you have multiple traditional IRAs, the IRS allows you to take your total RMD amount from any combination of those accounts before converting any remainder to a Roth IRA[1][3].
Tax planning is essential when considering Roth IRA conversions. Conversions increase your taxable income for the year, potentially affecting your tax bracket and eligibility for certain deductions. To manage the tax impact, consider spreading the conversions over several years[5].
Now, let's discuss the five-year rules. There are two five-year rules that apply to Roth IRAs: one for contributions and one for conversions. Each conversion has its own separate five-year period, which differs from the first five-year rule[4].
Under the second five-year rule, if someone younger than 59½ does a Roth conversion and later takes a distribution within five years of the conversion, the amount of conversion principal that is withdrawn is hit with the 10% penalty[4]. The first five-year rule applies to distributions of earnings after age 59½ and whether they are tax-free[1].
Lastly, it's worth noting that a non-spouse beneficiary of an inherited IRA cannot convert it to a Roth IRA. However, they can take taxable distributions from the traditional IRA and contribute to a Roth IRA, subject to contribution limits and AGI limits[6].
In summary, at age 73, with multiple traditional IRAs, you must calculate and withdraw your entire RMD for the year from any of your traditional IRAs before converting any portion to a Roth IRA and pay taxes on the converted amount[1][2][3][5]. Tax planning is crucial to manage the tax implications of these conversions.
[1] IRS Publication 590-B: Distributions from IRAs - https://www.irs.gov/publications/p590b [2] IRS Publication 590-A: Contributions to IRAs - https://www.irs.gov/publications/p590a [3] IRS Publication 590-C: Retirement Plans for Small Business - https://www.irs.gov/publications/p590c [4] IRS Publication 575: Pension and Annuity Income - https://www.irs.gov/publications/p575 [5] Savingforcollege.com - https://www.savingforcollege.com/ [6] IRS Publication 590-B: Distributions from IRAs - Section 10.2 - https://www.irs.gov/publications/p590b#en_US_2021_publink1000202217
In the realm of personal-finance, considering Roth IRA conversions is crucial for managing retirement savings, as it increases taxable income and could impact your tax bracket and eligibility for certain deductions. Furthermore, engagement in investing, specifically Roth IRA conversions, requires careful tax planning to manage the tax implications effectively.
