Q: Can you do a conversion from your IRA to a Roth IRA in the year you will be 70½? If so, must the conversion be done before you turn 70½?
A: There’s no age limit for doing a Roth conversion, says Jeffrey Levine, chief retirement strategist for Ed Slott & Co. in Rockville Centre, N.Y. You could do one at age 90 if you like. Yet converting a traditional individual retirement account, whose tax-deferred contributions are taxed when withdrawn, into a Roth IRA, whose contributions are taxed on the way in but not the way out, isn’t for everyone.
On conversion, you pay ordinary income taxes on the amount converted. (Some people stagger the move over a number of years, converting only enough not to bump them up into a higher tax bracket.)
A big reason why people choose to turn their traditional IRA into a Roth is if they think income tax rates will rise in the future, either for themselves due to rising income, or across the board for everyone. For example, people who defer taking Social Security until age 70 might see that income boost them into a higher tax bracket when payments finally begin. Some retirees convert to a Roth because they plan to leave IRA dollars to heirs who are in higher tax brackets.
If you think you'll be in the same tax bracket in the future, then converting would generally be “a wash,” Levine says. Ditto if you expect to outlive your funds and bequeath them to heirs whose bracket will be the same. Meanwhile, converting could be costly if you or heirs end up in a lower bracket in the future. One factor to weigh as part of your calculation: President-elect Donald Trump proposed across-the-board tax cuts during the campaign, and Republicans in Congress have also advocated lower tax rates.
Now, a word about timing: If you wait until the year you turn 70½ to do your conversion, you’ll have to take your required minimum distribution (RMD) first, Levine says. Uncle Sam requires you to take withdrawals from your traditional IRA every year starting at age 70½. It’s the government’s way of finally getting its hands on money that has grown with tax deferred for decades.
So you can’t do a conversion on the cusp of 70½ to escape that requirement. You’ll have to take your RMD, which will be taxable, then convert and pay taxes on the amount converted. You’ll have a big tax bill that year, but after that you can withdraw your Roth funds tax-free for the rest of your life.
Note that you have to take your RMD before you convert even though the general rule is that you can wait until April 1 of the year after you turn 70½ to take your first RMD. (Every year after that, the deadline to take your RMD is Dec. 31.)
What if you want to convert to a Roth IRA the year after you turn 70½, and you wait until the first quarter of that year to start your RMDs? Then you’ll have to take two RMDs before you do any Roth conversion, Levine says. That’s not an optimal scenario, he says: “Ideally, we like to do planning before this point.”