Are Roth Conversions Right for People Over 73?

Individual IRA owners who reach the age of 73 in 2023 must begin taking Required Minimum Distri­b­u­tions (RMD) by April 1, 2024. If you wait until 2024 to take the first distri­b­ution you will also have to take another distri­b­ution before the end of the year. You may want to take the first distri­b­ution in 2023 to avoid having two distri­b­u­tions in the same tax year.

Roth IRAs are not subject to RMD rules. Retirees who do not need money from their IRA to support their lifestyle may want to consider converting their IRA (or a portion) to a Roth to avoid RMDs. Those consid­ering a conversion must remember that the amount of the RMD is not eligible for conversion to a Roth.

The first dollars taken from an IRA after you reach age 73 are deemed by the IRS as going toward the RMD. Therefore, you must distribute the RMD before any amount of your IRA is converted to a Roth. Failure to do so could result in an excess contri­bution to a Roth IRA. The IRS levies a 6% penalty for each year this money remains in the Roth IRA.

The pro-rata rule applies to RMDs in the same way it is used for Roth conver­sions. For example, an IRA owner has an account worth $100,000, of which $15,000 is after-tax contri­bu­tions. The owner is over 73 and has to take a $3,000 RMD before converting $20,000 to a Roth. 15% of the RMD ($450) is considered after-tax and 15% of the Roth conversion ($3,000) is after-tax.

What Makes a Roth Conversion a Good Decision?

1. The money will be in the Roth growing tax-free for a very long time. The longer it stays in the Roth, the more advan­ta­geous the conversion.
2. You can convert the money in a lower tax bracket today than you expect to be in future years. Paying 12% tax today on a Roth conversion beats paying 22% later when you have to start taking RMDs.
3. You can pay the income taxes due on the conversion without using funds from the tradi­tional IRA when you convert.
4. You don’t expect to need the Roth IRA assets for income and want to build an estate for your heirs. In this case, the Roth IRA can minimize the overall income tax burden to the family; heirs receive the proceeds free of income taxes, and in the interim, the proceeds can continue growing tax free.
5. You don’t expect to need income from your IRA, and you wish to avoid the annual mandatory distri­b­u­tions required from a tradi­tional IRA when you reach age 73.
6. You believe current income tax rates are at the lowest level now and Congress will most likely increase tax rates in the years to come.

You should consult a tax advisor or financial planner if you are turning 73 and consid­ering a Roth conversion.

Origi­nally posted March 2018