Are you considering whether to convert your traditional IRA into a Roth IRA? There could be some benefit in doing so. With a Roth IRA, you’re allowed to take withdrawals tax-free after age 59½. Withdrawals from your traditional IRA are taxed as ordinary income.
Another potential benefit is Roth IRAs don’t have required minimum distributions (RMDs) at age 70½. If your goal is to keep your funds in your IRA as part of a legacy planning strategy, the idea of eliminating RMDs may be appealing.
You might wonder whether you can do a conversion after you retire. The simple answer is yes, you can. There is no age limit on IRA conversions. In fact, you can even do a conversion after age 70½.
However, just because you can do a conversion doesn’t mean you should. There are a few important ramifications to consider. Every person’s needs and goals are different, so it’s important you analyze the conversion carefully and review your unique situation before moving forward.
The Ripple Effects of Conversion
An IRA conversion always generates some form of tax liability. That should be expected since you are eliminating an account with taxable withdrawals in favor of an account with tax-free withdrawals.
However, the conversion can have some other unexpected consequences. These consequences stem from the fact the conversion will inflate your adjusted gross income during that particular tax year. Depending on how high your income is, your Social Security could be taxed at a higher rate and your Medicare premiums could rise.
For example, in 2016, the base level for Medicare Part B premiums is $121.80 per month for singles with up to $85,000 in income and couples with up to $170,000 in income. The premiums rise, however, once your income exceeds those thresholds. At the highest tier, premiums are $389.80 per month.
Taxes on Social Security also increase as income rises. At lower income levels, only up to 50 percent of Social Security benefits aretaxable. However, as incomes cross into higher tiers, up to 85 percent of benefits may be taxable.
Develop A Conversion Strategy
If you want to convert, but don’t want to trigger higher premiums or taxes, it’s important you put a strategy in place to convert your IRA safely. One strategy may be to convert it in portions. There’s nothing saying that a conversion has to take place all at once.
You can convert a portion each year and keep a careful eye on the Medicare and Social Security thresholds. For more information, talk to your insurance or financial professional along with your tax professional. They can help you develop a plan to convert your IRA into a Roth.
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