Q. I transferred my 403 (b), 457 and Roth accounts from a former employer to my current employer 15 years ago. The 403 (b) and 457 are now in an IRA. I would like to start transferring some of the money, $ 10,000 per year, from this IRA to a Roth. Can I use the Roth I already have? When I retire in five years, my pension and social security will keep me in a high tax bracket. I am concerned about taxes because all of my accounts are pre-tax. I am 69 years old.
A. Let’s review how Roth conversions work and the pros and cons.
Like you said, taxes are the key to consider before you move.
A conversion can reduce taxes in the future by eliminating the requirement to take minimum annual distributions, said Cynthia Fusillo, chartered accountant at Peapack Private Wealth Management in New Providence.
To you, a conversion sounds attractive given that you expect to be in a high tax bracket, even in retirement, she said.
Traditional IRA owners should start making annual withdrawals, based on actuarial life expectancy tables, at age 72. Failure to do so subjects the IRA owner to penalties of 50% of the shortfall, Fusillo said. Roth IRAs are attractive in large part because there is no such minimum withdrawal requirement.
“Your Roth income continues to grow tax-free, just like in a traditional IRA, and this is also attractive to those who wish to leave some or all of their IRA money to the heirs,” she said.
On the conversion side, you will need to find funds to pay the taxes today, so it is important to assess how much that will be and that you have a pool of non-IRA money to pay the conversion tax, a said Fusillo.
“Since there is a tax associated with the conversion, taxpayers will often look for a year where they are in a lower tax bracket,” she said. “For younger taxpayers, the Roth conversion limits when earnings can be withdrawn – usually not for five years – before age 59 and a half.”
You can certainly withdraw $ 10,000 per year as you requested and convert it annually to your existing Roth account, Fusillo said.
“Without knowing the size of your traditional IRA, it’s hard to know if you’ll meet your goal of trying to minimize retirement income at this conversion level, which means you can still end up with a large balance in it. your traditional IRA by the time you hit 72, ”she said. “But you can certainly convert as much as you want as long as you’re prepared for the associated tax.”
These rules can be complex, so we recommend that you consult your tax advisor before making a decision.
Email your questions to [email protected].
Karin Price Mueller writes on Bamboo column for NJ Advance Media and is the founder of NJMoneyHelp.com. Follow NJMoneyHelp on Twitter @NJMoneyHelp. Find NJMoneyHelp on Facebook. Sign up for NJMoneyHelp.com‘s weekly electronic newsletter.