There is so much talk, writing, podcasting, etc. on Roth conversions these days. Ultimately, I don’t feel doing Roth conversion (or not) will materially impact the retirement cash flow of 90% retirees. It might affect their estate plan, but that’s another blog for another week. Specifically next week.
Here are three reasons I think most seniors can ignore the Roth conversion talk:
- Doing Roth conversions to avoid RMDs. Required Minimum Distributions are in place to force people to withdraw their tax deferred assets during their lifetimes. The vast majority of retirees don’t need RMD rules to do this. They are taking the money out anyway to pay their bills. This is what we saved money in retirement accounts to do – spend it!
- Roth conversions to avoid RMDs Part Deux. Maybe you are the lucky/smart retiree that doesn’t need to spend down your tax deferred money. By doing a Roth conversion before age 72, you are taking money out or your tax deferred accounts and paying taxes even earlier than RMDs.
So, what have you accomplished? Yes, tax free growth for the future, but as a retiree, your future is now! Once you pay for the taxes, you may be waiting many years to earn enough to make up for the early IRS bill you paid to do the conversion. In many cases, you started RMDs on yourself earlier.
- Do you have the cash to pay the taxes? Say you do a $20,000 Roth conversion and you are in the 22% tax bracket. That’s an extra $4,400 in extra federal income taxes (plus state if that applies to you). That money needs to come from another non-IRA account.
If you use tax-deferred money to pay the tax bill on a conversion, you will owe taxes on the $4,400, and so on. I’ve noticed many clients have an abundance of retirement accounts but not so much in taxable accounts. Paying taxes on doing Roth conversions from their non-IRA accounts exacerbates this problem.
Don’t worry, I’ll also cover reasons why Roth Conversions may make sense for a retiree. Next week. So yes, this is a cliffhanger blog.