Ask Terry Questions IRA transfer to ROTH IRA for a Senior

IRA transfer to ROTH IRA for a Senior

By Terry Savage on August 26, 2018 | Financial Planning / Retirement

I would like to roll my IRA savings to a Roth IRA. Could I take my IRA RMD and put it into a Roth up to the level of our standard deduction tax free?

I am retired and my Social Security income covers 90% of our expenses. My wife does not have an income. I have substantial IRA savings plus a sizable checking account. I have to withdraw RMD being over 70 years old. I live in a no income tax state – Florida so my Social Security income is not taxed. We file a joint return so with the new individual tax deduction we will pay zero Federal Tax as our taxable income is just the RMD. Thus we are not utilizing most if not all of our our deduction.

I would appreciate your reply.

Thank you.

Terry Says

OK, so first you need to know that you can only contribute to an IRA — either a traditional or a Roth — if you have EARNED INCOME in that year. Social Security, IRA distributions, dividends, etc do not count as earned income.

Next, yes, you can convert all or part of a traditional IRA to a Roth, paying the taxes as if the amount of the conversion were added to you ordinary income. But beware, converting TOO MUCH might raise your income and affect some benefits, such as the cost of your Medicare Part B premiums, and the Federal taxation of your Social Security benefits!

Also, you should have money OUTSIDE your IRA to pay those taxes on the conversion. (You could use your distribution money to do this — or use other savings.)

BUT the real question is WHY you want to do this at this late stage in your life. Most people open ROTH IRAs because they have years to make the money grow tax-free. That’s not true in your case. And if you don’t spend the IRA money — whether in a Roth or traditional — your beneficiaries can keep the money growing inside the IRA (subject to minimum distribution requirements for either an inherited traditional or Roth IRA).

I don’t see any advantage in making a Roth conversion at this point in your life. If you don’t know what to do with your annual distributions, consider paying for a grandchild’s college education, or making a charitable contribution. (The latter doesn’t include “contributing” taxes to the government before they are owed, at this stage of your life!)

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