Q: I have about $40,000 in an IRA which I do not need. I am 78 and would like to do something with it before the end. I know if I take it all out at one time, the tax would be heavy. Any suggestions?
A: First, run the numbers and make sure you definitely won’t need that money for future income, health care expenses, or other essentials.
Then, you might consider rolling your current IRA into a Roth IRA, suggested Rich Arzaga, founder and CEO of Cornerstone Wealth Management. “A Roth conversion will move your $40,000 from a taxable IRA account with required minimum distributions to a tax-deferred IRA account where withdrawals will never be taxed,” he said.
Since converting pre-tax retirement money to a Roth IRA will trigger a tax bill on the amount you convert, determine if you want to roll over those funds all at once or spread it out over the course of a few years, which will also help you space out the associated tax obligations.
Despite that tax bite, Arzaga said there is a bigger potential benefit here: Once the funds have been rolled over into a Roth IRA, you or your beneficiaries won’t have to pay any further taxes. “When we do the analysis on this, even after taxes are paid in the conversion, it means a higher amount to beneficiaries, and no taxes," he said. “Depending on life expectancy, I have seen this strategy double the amount left to beneficiaries.”
Or you could always give the money away, which has the double advantage of benefiting a cause you believe in and lowering your taxable income. “If charitably inclined, tax on an IRA distribution can be entirely avoided by directing the distribution to a charity,” said Jeff Fosselman, senior wealth adviser at Relative Value Partners. Because the distribution is not counted as part of your income, donating it directly to a charity could lower the taxes you pay on your Social Security benefits, as well as the Medicare surcharge on high-income individuals.
There are a few caveats here, Fosselman said. This option is only available to people once they’ve reached the threshold for required minimum distributions (70.5 years old, which means you qualify) and your beneficiary organization has to qualify as a charitable organization as per IRS guidelines. Furthermore, distributions are limited to $100,000 (not an issue in your case, given the size of the IRA in question) and must be given directly to the charity. If you instead take the distribution and donate it yourself, you can claim the donation as a deduction, but the distribution will count towards your taxable income.