Inquiry Regarding Tax Matters on Roth IRA Transformations, August 8th
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As you approach retirement, managing your retirement savings becomes increasingly important. One option to consider is converting traditional IRA funds to a Roth IRA, even if you're over 70. Here's what you need to know about the process, its implications, and the associated rules.
RMD Requirement
At age 73, individuals with traditional IRAs become subject to Required Minimum Distributions (RMDs). Before converting any funds to a Roth IRA, you must first withdraw the total aggregated RMD amount from all your traditional IRAs[1]. The RMDs cannot be converted to a Roth IRA; they must be taken as taxable distributions.
Tax Consequences
Any amount converted to a Roth IRA is taxable income at your ordinary income tax rate in the year of conversion[2][3][4]. This can result in a significant tax bill, especially since RMDs and conversions are both taxable events.
No Age Limit
Contrary to popular belief, there is no age cap on Roth conversions. A 73-year-old can convert to a Roth IRA regardless of age or income[2][5].
Multiple IRAs
The RMD calculation is aggregated across all traditional IRAs. However, conversions can be done from any or all IRAs, separately or combined, after satisfying the total RMD[1].
Benefits of Conversion
Although the owner must pay taxes upfront, Roth IRAs offer potential advantages such as tax-free growth, no future RMDs, and tax-free withdrawals for beneficiaries, which can be valuable from an estate planning perspective[2][4].
Planning Strategy
To manage the tax impact of conversions from multiple traditional IRAs, it's often beneficial to execute partial conversions spread over several years[3]. This can help avoid pushing income too high and maximize deductions or credits.
Five-Year Rules
Each conversion has its own separate five-year period. Additionally, there are two five-year rules that apply to Roth IRAs: one for contributions and rollovers, and one for conversions[6]. The second five-year rule for Roth IRA conversions applies to distributions within five years of the conversion and before turning 59 1/2, and the amount of conversion principal that is withdrawn is hit with the 10% penalty.
Consultation Recommended
Given the complexities involved, it's advisable to consult with a financial or tax advisor regarding any questions related to the matters discussed in this article[7].
Contribution Limits
For 2025, the Roth IRA contribution limit is $7,000, with an additional $1,000 catch-up contribution for individuals age 50 and older[8]. The AGI limits for Roth IRA contributions start at $150,000 for single filers and $236,000 for joint filers.
Inherited Roth IRAs
A nonspouse beneficiary cannot convert an inherited traditional IRA to a Roth IRA. However, a non-spouse beneficiary can take taxable distributions from an inherited traditional IRA and contribute the post-tax money to a Roth IRA, subject to annual contribution limits and AGI limits[9].
For more detailed information about the five-year rules for Roth IRAs, please refer to "what to know about the five-year rules for Roth IRAs".
If you have questions about tax topics, subscribers of The Kiplinger Tax Letter, The Kiplinger Letter and The Kiplinger Retirement Report can ask Joy Taylor questions directly[10].
- Although age 73 is when Required Minimum Distributions (RMDs) become necessary for traditional IRA holders, there is no age limit for converting those funds to a Roth IRA.
- By converting traditional IRA funds to a Roth IRA, you may incur a significant tax bill in the year of conversion due to the taxable income status of the conversion, but the potential benefits such as tax-free growth and tax-free withdrawals for beneficiaries can be valuable from a personal-finance perspective.
