A financial advisor has responded to a reader's inquiry regarding a potential Roth IRA conversion. The reader, identified as Thomas, is 60 years old and holds $100,000 in a traditional IRA. He receives an annual pension income of $65,000.
Thomas stated he is aware of a five-year rule concerning earnings but does not plan to need the converted funds until at least age 70. He asked if converting some money from his traditional IRA to a Roth IRA is advisable.
The advisor, Brandon Renfro, CFP®, indicated that a Roth conversion is worth considering. He clarified a point about the five-year rules, noting that because Thomas is over 59½, he would not face a 10% early withdrawal penalty on distributions taken less than five years after a conversion. However, if this is his first Roth IRA, he would need to wait five years to withdraw earnings tax-free.
The primary reason cited for considering a conversion is saving money on taxes. The advisor noted Thomas's current income places him in a relatively low tax bracket. He mentioned that Thomas's pension income is stable, with little expectation of it decreasing. The advisor also pointed out that provisions of the Tax Cuts and Jobs Act are set to expire at the end of 2025, which could lead to higher income tax rates.
The response addressed potential Social Security benefits. It explained that the taxable portion of Social Security benefits depends on other income. Withdrawals from a traditional IRA are included in this calculation, while qualified withdrawals from a Roth IRA are not. The advisor stated that converting funds now would increase taxable income for the year of conversion but would not affect future Social Security taxation, as Thomas is not yet collecting benefits. Later, tax-free Roth withdrawals would not increase taxable income, potentially reducing the portion of Social Security benefits subject to tax.
Another reason given for a Roth conversion is greater control over distributions. The advisor noted that required minimum distributions (RMDs) must be taken from a traditional IRA but not from a Roth IRA. This could offer more flexibility in planning the timing and amount of withdrawals. The advisor suggested that a series of gradual Roth conversions over the next few years might be sensible, allowing Thomas to utilize his current tax bracket fully.
The advisor concluded by stating that, based on the information provided, Thomas appears to be in a good position to consider Roth conversions. He recommended giving the strategy a deeper look.