ROTH IRA CONVERSION
Dear Terry,
Hoping you can help as no one seems to be able to give me a straight answer. I have 120K in a traditional IRA and 58K, in a 401-3(c) and a 30K pension. (I know I will pay taxes on 85% of SS benefits.) I am retired, 66, single and living on pension only. Still hoping to take SS at 70. I do have 50K in savings account and a SMALL portfolio of 50/50 stocks & bonds but have taken a large hit on what I worked so long to accumulate. I am living in fear of all the taxes I will have to pay. Should I convert to Roth IRA now before RMDs start or is it too late for me? I trust your advice, Terry, only wish I would have been contributing to Roth from the start. Any guidance is GREATLY appreciated. Stay safe and healthy.
Thank you kindly ,
Terry Says
So here’s the thing about a Roth conversion. YOu have to pay taxes immediately on all the money in the conversion — at your marginal tax rate. And the money should come from OUTSIDE your Roth IRA.
First, you want to make sure you’re not converting to the Roth and paying taxes at the “top” of the market. Think of how terrible you’d feel if you paid those taxes and then the value of the account dropped sharply. Well, we’re past that point now.
Second, you have to think about whether it’s a good idea to use up those after tax savings, liquidity, to pay the taxes now. That might depend on whether you think tax rates will rise in the future.
So this is a three dimensional chess puzzle. You’re going to pay taxes SOMETIME — either when you take the money out in RMDs in the future — Or you can give it to the government now.
As a reminder, you can do a PARTIAL roth conversion of that IRA, if that makes you feel beetter. But at this point, even though tax rates may rise in the future, I think you should concentrate on HOW YOUR MONEY IS INVESTED, rather than how much taxes you will eventually pay on withdrawal.
And one more thing, tho you didn’t ask. You didn’t mention having Long Term Care Insurance, which might be a smart investment for a portion of you money, assuming you are a woman alone.
