Are Roth Conversions Right for People Over 70-½?

Roth IRAs are not subject to RMD rules.

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Individual IRA owners who reach the age of 70-½ in 2012 must begin taking Required Minimum Distributions (RMD). However, 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 70-½ 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 70-½ 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 is generally:

  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 15% tax today on a Roth conversion beats paying 25% later when you have to start taking RMDs.

You should consult a tax advisor or financial planner if you are turning 70-½ and considering a Roth conversion.

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