Should someone who is Retired convert to a Roth IRA?
The RETIRED Roth Conversion: Aleady retired - should you convert to a Roth?
Use the calculator at Roth Conversion Calculator to help you with your conversion:
Roth IRA Conversion with Distributions
If you are already retired, then the question is usually much less about the taxes as it is about distributions. Actually, its always about taxes, but distributions are a close second. The only reason to convert if you are already retired is this: You don't need the money that you are required to withdraw through Required Minimum Distributions (RMD).
To determine your RMD for a IRA or 401(k) or other qualified account, you can use the calculator at: Required Minimum Distributions Calculator
To stop the RMDs, you can convert to a Roth. But – you will be taxes on the current conversion immediately, which can increase your tax liability. Here is what you need to ask yourself:
- Do you need the money? This may seem silly, but its important. Do you need this money for yourself? If you are going to use up the IRA for your own expenses and retirement don't count on any advantage from stretching out distributions to yourself or your beneficiaries (like your spouse or children). This is usually a deal killer. A retired conversion may work well if you want to avoid Required Minimum Distributions, but if you need to take the money out anyway, there is probably no point in converting.
- What is your real marginal tax rate for the conversion? Two factors make this tricky. First, your taxable income may be lower in retirement, so even modest conversions can often span more than one tax bracket. Second, any amount you convert will increase your taxable income, which can trigger taxability on your Social Security income. You need to know the real marginal tax rate for the increase in taxable income caused by the conversion. Using your tax bracket alone will under-estimate your tax liability.
- What is your marginal tax rate for retirement without the conversion? More than likely, unless you are already in the highest bracket, this will be lower than your conversion tax rate. This might not kill the deal, but a lower tax rate through your retirement than what you paid on the conversion is hard to overcome. But, if you don't need the money during your retirement and wish to leave a tax free inheritance, you still might see an advantage to the Roth conversion.
Use the calculator at Roth Conversion Calculator:
Roth IRA Conversion with Distributions
Other Related Calculators:Simple Roth Conversion
Required Minimum Distributions for IRAs and Qualified Accounts
Marginal Tax Rate Calculator
Even more Roth Conversion factors to consider:
Should I delay my tax bill to 2011 and 2012? Unless you are in the highest bracket (35%) this is probably a good option. Run your analysis both ways to make sure, but unless your tax rate goes up in 2011 and 2012, delaying works for you. The exception is if you know you will be in the top tax bracket for 2010, 2011 and 2012. Currently the top tax bracket is scheduled to rise to 39.6% in 2011. In this situation, paying your entire bill in 2010 might work to your advantage.
Should I convert only part? If it's a good idea to convert some, in this situation it's probably a good idea to convert all of it. But – make sure you can afford the tax payment. If you can't, or it's just too much of a stretch, maybe a partial conversion is a good option.
Try to run through multiple scenarios for the factors that affect your situation. Splitting your tax bill or not is pretty easy to test out. Predicting your future tax rate? This is much more difficult. Now try it all again with only half of your balances. One point of all of this I want to make clear: The harder something is to predict, the wider range of potential outcomes you need to plan for. So, mix it up! Run your scenarios and compare the results and decide for yourself: Should I Convert to Roth?
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