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WE LOOK AT OUR traditional IRAs each year and decide how much we’ll convert to a Roth IRA. We’re worried our tax rate may increase down the road, either because of tax law changes or because of the extra taxable income once we start taking required minimum IRA distributions at age 72. To head off that threat or at least limit the damage, we’ve been shrinking our traditional IRAs by converting them to Roths, where the money should grow tax-free thereafter.
There’s talk in Washington of making changes to Roth IRAs. These proposals include putting a cap on how much can be held in a Roth or added once it reaches a certain size, removing the ability to put alternative assets into a Roth or possibly eliminating Roth conversions altogether.
Then comes the other part of the equation. If we make a large Roth conversion, which increases our income, we’ll face not just a bigger income tax bill, but also higher Medicare premiums. The bottom line: We’re working with our accountant, trying to figure out where the sweet spot is—and then we’ll make a conversion equal to that amount.
This is a tough decision to make. I’d hate to convert a lot of my traditional IRA to a Roth IRA, only to have the equity market signficantly decline and stay at a more reasonable, lower level. Then, I would have paid lots of income taxes and my IRAs would be smaller. Hard to make a rational decision to convert with so many unknowns.
Is first converting when Medicare age, given the five year holding period is it worth it?
If starting your Roth at 65, conversion amounts are immediately available, just not any earning gained while it is in the Roth if account is not at least 5 years old.
I haven’t converted as of yet. Not seeing a compelling reason for me to do so given my uncertain situation. Medicare premiums is a real issue — by not converting I may end up paying $200 more per month. But then I look at the other uncertainties involved in conversion and think what I don’t know may end up costing me more than the Medicare savings and so I do nothing. I keep an open mind and I appreciate your insights.
Hands off our Roths!