Dear Carrie: At age 80, I've never put any money into my IRA since retirement. Can I roll my traditional IRA into a Roth IRA without penalty? --A Reader
Dear Reader: The simple answer to your question is yes; you can convert your traditional IRA to a Roth IRA without penalty. And since you're over 59 1/2, you'd be able to withdraw the assets you convert at any time, also with no penalty. Before age 59 1/2, a Roth must be open for five years before you can make withdrawals penalty-free. But in your case, only the earnings in the Roth would be subject to the five-year holding period.
That said, I'd turn around and ask you (SET ITAL) why (END ITAL) you're considering such a move at this time in your life. Some of the benefits of a Roth, such as tax-deferred growth over time and the possibility of being in a higher tax bracket in the future, are somewhat lessened at your age. Plus, while a Roth conversion wouldn't incur a penalty, you could end up paying a lot in income taxes. There are, however, positive estate tax reasons to convert to a Roth.
A POTENTIALLY COSTLY MOVE RIGHT NOW
The biggest deterrent to converting to a Roth is that you have to pay income taxes upfront for the amount you convert. The assets you convert are added to your gross income in the year you make the conversion, so depending on the size of your traditional IRA, you could be bumped into a higher tax bracket. That could translate into a hefty tax bill.
This raises a lot of questions. Can you afford to pay the taxes in a lump sum? Or is it better to spread out your tax payments as you take withdrawals from your traditional IRA over time? If you decide to convert, where will the money to pay the taxes come from? Ideally, you would want to pay the taxes with money from outside your IRA. Otherwise, you could be depleting your IRA assets considerably -- assets that you may need for your everyday income.
One way to keep a Roth conversion tax bill from getting out of hand is to convert only a portion of your traditional IRA. In fact, it's possible to make several conversions over several years into different Roths. The downside of that strategy is that multiple accounts could end up complicating your finances.
A POSSIBLE GOOD MOVE FOR THE FUTURE
From an estate planning perspective, however, converting to a Roth IRA now could make sense. If you're planning to leave your IRA assets to your heirs, it's a real plus for them. In effect, you'd be prepaying the income taxes on their behalf without it being a taxable gift. And your heirs can then take income-tax-free withdrawals during their lifetimes. Also, the tax you pay upfront on the conversion reduces your gross taxable estate, especially when you pay from assets other than your IRA.
THE RMD FACTOR
Another thing to consider is that there is no required minimum distribution, RMD, for a Roth IRA. So if your current RMD is more than you need, converting to a Roth would allow you to take as much or as little from your Roth as is necessary--preserving more for your heirs. And, since you will already have paid the income taxes on those assets, you can calculate your withdrawals without worrying about your tax implications.
One caveat: If you do decide to convert to a Roth, be sure to take your RMD for the year before completing the conversion. RMDs are calculated based on your traditional IRA balance at the end of the previous year and cannot be part of a Roth conversion.
No matter your age, there's a lot to think about when converting to a Roth IRA. I suggest you talk to your tax advisor or other financial professional to determine if it makes sense for you. All the best.
Carrie Schwab-Pomerantz, CERTIFIED FINANCIAL PLANNER(tm), is president of Charles Schwab Foundation and author of "It Pays to Talk." You can e-mail Carrie at email@example.com. This column is no substitute for an individualized recommendation, tax, legal or personalized investment advice. To find out more about Carrie Schwab-Pomerantz and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.
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