Over 50? Consider Roth Conversion to Avoid RMDs

By Elsie Dudukovich2 Comments
One of the many reasons people choose to open an IRA is to gain a tax-advantaged way of saving for retirement. A Traditional IRA gives that advantage by allowing for a tax deduction on contributions, among its many benefits.   However, the Required Minimum Distribution (RMD) is one of the unique features of the Traditional IRA.  Starting at age 70½, you’re required to take a specific amount from your account yearly or face additional taxes and penalties.  As with any Traditional IRA distribution, those funds or assets will be taxed as ordinary income. 

In a recent study by the Vanguard Group, it was noticed the amount Roth conversions increased during the decade following clients turning age 60, and this increase can largely be tied to the approaching RMD.  Vanguard Senior Investment Analyst Maria Bruno comments on this trend, “It’s always best to plan earlier than wait for the RMDs to start,” and her reflection presents a strong point for consideration.

If you had to previously forgo opening a Roth IRA because you exceeded the income limit, it’s important to note those limits were removed by an IRS rule change in 2010.  You can have a Roth IRA and fund that account with Roth conversions.  While it’s true you will be taxed at your ordinary income rate for the converted funds, you would also be taxed in the same way on any distributions you take from a Traditional IRA.  The tax obligation presented during a conversion is something to be aware of, but remember: you don’t have to convert all your Traditional IRA funds to a Roth IRA at once.  You’re free to do several conversions over time and in the amounts you see fit.

A Roth conversion is a taxable event, yet presents an interesting option for tax diversification.  Taking the time to review this consideration with a trusted tax advisor is something to consider as part of your long-term financial planning.

You can also talk to an Equity Trust Senior Account Executive about your account options. Set up a free one-on-one IRA checkup today.