Q: I want to convert my traditional IRA to a Roth. I’m 62, receive a military pension, and have not started receiving Social Security. I file jointly with my wife, who has no income, and I'm in the 10% to 15% bracket. What are my options? And can I put some of my IRA into my wife’s Roth? — Doug
A: There are many reasons why it might make sense to convert some of your traditional IRA savings to a Roth, even if you are already in retirement.
While you will need to pay ordinary income taxes on any savings you shift from a traditional IRA to a Roth, future withdrawals from that Roth will come out tax free. And since you’ve yet to start taking Social Security, it’s possible that your tax rate is lower now than it will be when those payments kick in.
Do the Math
Before you convert, however, you need to do your own calculations to determine whether the juice is worth the squeeze. “Are the long-term benefits of converting worth the immediate cost?” asks Bill Dix, a certified financial planner with Fortune Management in Raleigh, N.C.
If you can pay the tax on your conversion with funds outside of your retirement savings, then it might make sense to roll over to a Roth. “But if you need to pull money out of your savings to pay the tax, I would probably argue against doing a conversion at this stage of the game,” says Dix.
The reason: When you use some of your retirement savings to cover the tax bill on the conversion, he says, you effectively cheat yourself out of long-term, tax-deferred growth.
Think of it as a two-horse race: Say that Horse #1 is your traditional IRA with $50,000 and Horse #2 is a Roth with $40,000 – your hypothetical balance if you use retirement savings to pay the federal and state taxes on the conversion.
“Horse #1 is going to be so far ahead out of the gate that Horse #2 may never catch up, even after accounting for the taxes Horse #1 will owe in the home stretch,” says Dix.
The end result will, of course, depend on a number of factors, including your time horizon, tax bracket and expected return, among other things. To get a better idea, plug your estimates into a Roth conversion tool, such as one offered by CalcXML, Fidelity, or Schwab.
Take it Slow
What’s more, remember that you don’t need to roll your savings into a Roth in one fell swoop.
A better option may be to convert over several years, using funds outside of your savings to cover the tax bill, says Dix. Doing so can also help you avoid getting bumped into a higher bracket, since any money you convert from a traditional IRA to a Roth will be considered taxable income.
As for putting some of your traditional IRA money into your wife’s Roth, that is not an option. Your wife can roll her traditional IRA savings into a Roth, and you may use your earned income to fund a new Roth in your wife’s name. “But you may not roll over your savings to her IRA,” he says. “There is no cap on what you can rollover, so there is little benefit in doing so anyway.”