My wife and I are 65 years old and I am newly retired. We have a large taxable account ($1,000,000) and we each have significant traditional IRA accounts ($300,000). We each have smaller Roth accounts ($50,000). With my pension plus other income less deductions our taxable income will be about $90,000. Is there any advantage in doing a Roth conversion this year?

– Wondering what the advantages are.

Many people have some time between retiring and having to take required minimum distributions where their taxable income is at its lowest. We call these years “the gap years.” In your case, you are already taking a pension and are therefore in a different situation.

Since you are married filing jointly, you are in the low end of the 25% marginal tax bracket which goes from $74,901 to $151,200.

That means that this year you could do a Roth conversion of up to $61,200 and still be in the 25% marginal tax bracket.

You or your wife may already be taking Social Security using “File and Suspend” methodology. But in 5 years, you may increase your Social Security as you turn 70 and are required to start taking benefits.

In 5 years when you turn 70 1/2 you will also be required to start taking required minimum distributions (RMDs). RMDs at age 70 are 1/27.4 of the account value. With IRA account values of $300,000 each, in five years they will have grown to $440,798 each (8%). At those values, your required minimum distribution would be $16,087.53 for each account, adding about $32,175 to your taxable income. Just like a Roth conversion, this income will be taxed at the 25% marginal tax bracket.

You can do a Roth conversion now and pay federal tax at 25% or you will have to take RMDs in five years and pay 25% federal tax then. On the surface, it doesn’t seem to benefit you to do a Roth conversion now, but there may yet be some hidden value. So what are the benefits of converting now?

Benefits of doing a Roth Conversion

1. Assets now in your traditional IRA will be forced to leave due to RMDs and all the capital gains and dividends those investments earn will become taxable. Moving those assets into a Roth IRA prevents all future taxation on that money, which may reduce your long-term tax burden.
2. When you do a Roth conversion you have the opportunity to undo the Roth conversion if the account subsequently drops in value and do a different or additional Roth conversion. You do not have this opportunity when you withdraw money from your IRA as a required minimum distribution.
3. When you do a Roth conversion you reduce the value of your traditional IRA. This reduces the likelihood of your traditional IRA growing to the point where the RMDs would push you beyond the 25% tax bracket and into the 28% tax bracket. If the IRA value grows precipitously this might help keep it trimmed and reduce the ultimate tax burden.
4. Leaving your heirs a Roth IRA instead of a traditional IRA will let the account value grow tax-free over their lifetime too, which is of enormous benefit.

Drawbacks of doing a Roth Conversion

1. Roth conversions can be a painful paperwork process.
2. Doing a Roth conversion may not ultimately have any tax benefits.

The Bottom Line

All things being equal, I think doing a Roth conversion of some amount well under the $61,200 would be beneficial. If you did a Roth conversion of $50,000 that would have the benefits of converting while providing $11,200 of breathing room to avoid surprises from pushing you into the 28% tax bracket.

So our recommendation would be to do a $50,000 Roth conversion now and then reevaluate it toward the end of the year.

But if you did not want to suffer the paperwork burden, then you could skip the conversion. After all, there may only a small benefit to a Roth conversion.

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