Today, let’s look at one of the strategies where a Roth conversion makes good sense. You are single, retired, and currently taking your required minimum distributions. You find that your taxable income puts you at a marginal 15%. Back to the tax table -
|Taxable income is
|But not over||The tax is||Plus||Of the amount
After deductions, your income is in the high $20K range. You’re looking at the required minimum distributions, in Publication 590, and see how at 75 you need to withdraw 4.4%, but by age 85, the percent you must withdraw creeps up to 6.8%, and hopefully, your account has grown as well. Ideally, you’d like to pay 15% on as much of your lifetime income as you can, and this method is a simple way to do that. During the year, convert a portion of your IRA to a Roth. A bit more than to hit the line from 15 to 25%, for 2012, we’re looking at $35,350. So if you think your taxable income will be $27,000, convert $10,000 of your IRA to Roth. In March, when you’re doing your taxes, you’ll have an exact number, and whatever amount you exceeded the $35,350 you will recharacterize back to the Traditional IRA. A bit of paperwork each year, but as time passes, you’ll see the Roth account growing and the Traditional IRA diminishing a bit so your RMDs won’t push you into the next bracket. Also, once the Roth is 5 years old, you are able to withdraw from that with no penalty or tax on any or all withdrawals, so if in any year, you have a large expense, you won’t have to withdraw from the Traditional IRA and get hit with a higher tax bill.
Any questions regarding this strategy? Please ask!