You’re 60 years old and have $1.2 million in your IRA. Should you convert it to avoid RMDs?
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Mike Bernard, CFP® offers advisory services through KFG Wealth Management, LLC dba Korhorn Financial Group. This information is for general financial education and is not intended to provide specific investment advice or recommendations. All investing and investment strategies involve risk, including the potential loss of principal. Asset allocation & diversification do not ensure a profit or prevent a loss in a declining market. Past performance is not a guarantee of future results….(read more)
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Should I Convert My IRA to Avoid RMDs?
As retirement approaches, many individuals who have saved for their golden years through traditional Individual Retirement Accounts (IRAs) may be wondering about Required Minimum Distributions (RMDs). RMDs are mandatory withdrawals that must be taken from traditional IRAs and other retirement accounts starting at age 72, as mandated by the IRS. For some, the prospect of RMDs can be a bit overwhelming and may prompt them to consider converting their traditional IRA to a Roth IRA in order to avoid RMDs. But is this the right decision for everyone? Let’s delve into the pros and cons of converting an IRA to avoid RMDs.
First and foremost, it’s important to understand the key differences between traditional and Roth IRAs. Traditional IRAs offer tax-deductible contributions and tax-deferred growth, meaning that taxes are paid upon withdrawal. On the other hand, Roth IRAs offer tax-free withdrawals, as contributions are made with after-tax dollars. This fundamental distinction forms the basis of the decision to convert to a Roth IRA to avoid RMDs.
Converting a traditional IRA to a Roth IRA can indeed eliminate RMDs. However, it also incurs an immediate tax liability on the converted amount, as the funds are considered taxable income in the year of conversion. For this reason, a conversion may not make sense for individuals who are in a high tax bracket or who have a large IRA balance, as the tax bill could be substantial. On the other hand, those in lower tax brackets or with smaller IRA balances may find a conversion more financially feasible.
Furthermore, it’s important to consider your future tax situation. If you expect to be in a significantly lower tax bracket in retirement, a conversion may not be the best option, as you would essentially be paying taxes at your current (higher) rate. Conversely, if you expect your tax bracket to be the same or higher in retirement, a conversion may be more advantageous, as you would be paying taxes at a lower rate now.
Another important factor to consider when contemplating a conversion to avoid RMDs is the impact on your beneficiaries. Roth IRAs offer tax-free distributions to heirs, while traditional IRAs are subject to taxation. If leaving a tax-free inheritance is a priority for you, a conversion may be worth considering.
Ultimately, the decision to convert an IRA to avoid RMDs is a highly individual one that depends on your specific financial situation, tax circumstances, and long-term goals. It’s crucial to consult with a financial advisor or tax professional to thoroughly evaluate the potential benefits and drawbacks of a conversion. With careful consideration and expert guidance, you can make an informed decision that aligns with your retirement objectives.
Please explain backdoor Roth IRA
I find it hard to voluntarily pay more taxes now when Congress could raise the RMD age again and/or I don't even know if I'll be around at age 75.
Ha, ha. I’ve never met a CFP who would really do this at this level of detail. They stuff some numbers into a software package, set an asset allocation, and rebalance once a year – all for the low price of 1% AUM!
One other item to consider, especially if you married and older ….. I think you might want to factor in the possibility of going from married to widowed in which case one of you could end up on the higher, single tax brackets. So take into account both spouses .
His assumption that in retirement your rate will be less is FALSE! Add State to Federal and that is your marginal rate. Longterm average of the S & P is 6%. RMDs start at a lower rate but it increases to 16% in later years. 20-20 hindsight says get your money away from taxation PERIOD.
So the answer is … maybe.
I just retired. 59. I have 3.2 million in pre tax. I need to start major conversions starting this year. Like $300-400 k. A year. But if I make that much a year, it’s not moving the pre tax pot.
Younger people might want to consider staying away from the traditional IRA in the first place and contributing to a Roth or a taxable brokerage account. I did that in 1998, and I am now very pleased with my decision.