Roth Conversion
I am 63 years old. Is it a good idea to withdraw small amounts from my Traditional IRA and convert it to a Roth IRA?
Answers
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Here are a few reasons to convert traditional IRA accounts to Roth IRAs. 1. Lowers your RMD (starts for you in ten years at 73 yrs of age). 2. Leave money to your heirs tax free. 3. Pay the tax now so all of the future investments compound tax free. 4. Gives you a tax free bucket to dip into to as needed. If any of those apply, pick a tax bracket 10 / 12 / 22 or 24 and convert an amount that doesn't go into or to far into the next bracket and convert that amount as needed.
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thanks…it seems that your 3rd remark makes a lot of sense for me to start the conversion now. I can accumulate growth in both Traditional and Roth funds but the Roth fund is growing tax free. I’m just confused on point #4. Is it better to withdraw more and go into a little higher tax bracket or to stay low as possible like in a current tax bracket. Any thoughts?
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Hello, Alan19!
That is a great question!
Otter Oaks gave some great reasons why you'd want to convert a traditional IRA balance to a Roth IRA. Because there are many individual circumstances at play with this decision, I would recommend reaching out to a tax planner/financial advisor for assistance in determining how much, if any, you should convert year-to-year.
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When you start converting and how much you convert each year depends on each individual circumstance. If you are currently in the the 10% tax bracket, converting from a IRA to a Roth to put yourself into the 12% tax bracket is relatively minor in additional taxes. Likewise from 22 to 24. Going over 24 into the next bracket or jumping from 12 to 22 are harder decisions. What bracket you are in now and what bracket you think you may be in later are considerations.
My thoughts on #4. I like to stay fully invested. If I need funds for some unexpected event, I have 3 sources (accounts or vehicles) of assets available; Taxable (stock etf or mutual fund etc…), pre-tax traditional IRA's and tax-deferred Roth IRA's. Withdrawing from my taxable assets creates a taxable event (short or long term capital gains). Withdrawing from the traditional IRA's would create income taxes under most commons circumstances, BUT from a Roth IRA it doesn't create a taxable event and wouldn't push you into a higher tax bracket if you are doing conversions. Of course you can also have an emergency fund with X number of month living expenses set aside to handle this issue.
