The answer is yes

When Roth IRAs hit the retirement savings scene in 1997, many people lined up to convert their regular IRAs in order to reap the benefits.  Here’s a brief refresher:

  • Although Roth IRA contributions are not tax deductible, they are not taxed upon withdrawal.    And that applies to the earnings as well.
  • Distributions are not required at age 70 ½ like they are with Traditional IRAs.
  • The Roth IRA allows you to accumulate earnings tax-free with no time limit and you can bequeath the IRA to your beneficiaries if you wish.

Older individuals, however, may be hesitant to convert because they think they have little to gain.  Converting can actually be a smart move—especially before the age of 70 ½ — and here’s why.

As a retiree, you may be in a negative taxable income bracket, meaning that you have more itemized deductions than you do income, which results in $0 tax.  In this scenario, you would not be realizing any benefit from some of your itemized deductions.  Converting to a Roth will enable you to use these deductions and still be at zero tax.  For example, a taxpayer with an Adjusted Gross Income (AGI) of $40,000 but itemized deductions worth $70,000 could convert just enough to use those deductions and still not owe any tax.   In addition, converting some or all of your IRA to a Roth right after retirement up until age 70 ½  can reduce the amount of your Required Minimum Distributions — which are taxable — and therefore the taxes that you must pay on them.

There’s no need to convert your whole IRA to a Roth IRA all at once.  In fact, converting a little every year can be a good way to control your tax bracket.   This is also important as the amount of Medicare Parts B and D, Social Security, and other benefits you may be entitled to are based on your AGI (the lower the better).

Your Roth IRA Can Benefit your Heirs

By converting your regular IRA to a Roth, you will be passing an asset to your heirs that they will receive tax free.  In the case of a regular IRA, they will pay income tax on their required distributions so what you are effectively doing is paying the taxes for them.

Everyone’s situation is a bit different and should be evaluated on a case-by-case basis before making any decisions about converting.  Your financial advisor can provide counsel.  For more information, click here.