By Beth Pinsker
Since 2018, once you decide to move money out of the tax-deferred environment like an IRA or 401(k), you owe the tax, and you must carry through with the transaction. You can take contributions out of a Roth IRA, but there are caveats depending on if the transaction is subject to the Roth IRA five-year rule. It’s all complicated and merits caution.
Fix My Portfolio readers have a hard time with Roth conversions, and so do others out there who don’t have access to professional analysis to look at their financial details and weigh in on the best course of action. In the end, it’s a choice, not an objective math decision. It’s good to get guidance, because it’s a multivariable calculus, but it really comes down to your own wishes and needs.
Anyone out there considering a Roth IRA conversion should first ask what they are trying to achieve. Lower taxes on their own income in the future? Lower taxes for their heirs? Relief from high RMDs and Medicare IRMAA surcharges? Account diversification and additional flexibility for spending?
If none of those things apply, consider if you’re just looking at a Roth conversion out of a need to do something. Once you hit a certain part of retirement, where you aren’t saving anymore and you’re just on a downward spending glide path, some people find it’s hard to just go along for the ride.
Many readers send in their scenarios looking for something of a green light or permission to move forward. Here are some that describe typical situations:
The tax bill feels high, should we keep going?
Reader 1: My husband and I are both 65. We have about $2 million between us. My husband is still working and makes $130,000 a year. I am still working part time and will make $60,000 this year. We both plan on completely retiring next year. My account has an IRA worth $674,000 and my Roth has $263,000. My husband has approximately the same ratio of IRA and Roth values. We have been converting the IRA to Roth for the last couple of years, but had a big tax bill last year and don’t know if we should do that again. Is converting to Roth still a good strategy for us?
Green light: This couple has saved well and they can’t really go wrong either way. They’ll pay the taxes they owe one way or another, and can make a choice based primarily on the availability of cash on hand to cover the taxes on the income of the distributions.
Red light: This reader doesn’t mention any children or legacy concerns, so this money they have saved is most likely just for their own spending. With $500,000 in a Roth already, they probably have enough to diversify their holdings and could just hold off.
More to consider: To avoid more money going into their traditional IRAs while they are still working, they could save into a Roth 401(k) instead and/or make yearly Roth IRA contributions, depending on their overall income.
How close to RMD age is too close for a conversion?
Reader 2: I am 69 and have approximately $1 million in a self-directed IRA and $570,000 in a nonretirement account. I am working and plan to retire in two years, making approximately $33,000 a year for this job. I have a pension of approximately $120,000 a year that I am currently being paid. I have a 15-year house mortgage balance of $160,000. Should I convert to a Roth IRA or not?
Green light: This reader has plenty of cash on hand to pay the tax on a multiyear conversion. They could work with a tax professional or financial planner to run the numbers on strategy that will keep their overall income within the 24% tax bracket, which tops out at $197,300 for a single filer in 2025.
Red light: At 69, this reader is very close to the time of taking required minimum distributions (RMDs) and would not have a lot of time to lower the balance slowly. If there’s no pressing need to convert because of tax concerns or heirs, this person could spend down from their account and not worry about fronting taxes.
More to consider: With a pension and a job, this 69-year-old is already over the $106,000 threshold for paying IRMAA surcharges on Medicare Part B and D premiums. More income from a conversion will only add to that issue.
I’m at loose ends, what should I do next?
Reader 3: I’m 71 and widowed. I have approximately $1.3 million total in my accounts — IRAs, Roth, a small annuity, brokerage, banking accounts and a few CDs. I have a pension and Social Security that pretty much covers my daily expenses. No heirs to worry about a legacy. Last year I donated $10,000 to a couple of qualified charities, but I’m not sure if I’ll do the same this year. I helped some relatives with some “gifting,” well below the limits. I converted some IRA money last year to the Roth. Should I do the same again this year and bite the bullet? That put me into the IRMAA that actually cost me on my Social Security benefit. My RMDs in a couple of years will push my income up more of course and I already have to pay tax on 85% of my Social Security. Or should I just go and find something I’d like to buy and buy it? That’s actually some of the advice from the adviser at my brokerage.
Green light: This reader has the resources to do a Roth conversion, but that is not the whole picture. So this is more of a yellow light, perhaps, but perhaps a better use of funds than just buying stuff to buy it.
Red light: Without knowing the breakdown of the $1.3 million, it’s hard to say whether there’s enough cash on hand to cover the taxes on a large conversion, even stretched over several years. What’s really the stopping point here is the reason to do it.
More to consider: With no heirs and a charitable bent, a person might just as well continue to reduce the balance of their IRA with qualified charitable contributions (QCD), which you can start at age 70½ and can count for up to $108,000 toward your RMD with no tax consequences for your return. They could leave the balance of their IRA to charity in a will and there would be no tax consequences for a nonprofit recipient.
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