roth IRA conversion yes or no?

Question

I plan to retire at the end of January 2007. I will have $157,000 in a 457 plan and $97,000 as a partial distribution from a retirement plan that I plan to roll into a traditional IRAs upon retirement; and $21,000 already in a traditional IRA. My thought is to try to convert the 457 and traditional IRAs into Roths before the magic age of RMDs (70.5) and, coincidently for me, the year that the current tax rate may change for the worse. If I convert the $21,000 traditional IRA this year to a Roth, it will throw me in the 28% bracket . My son tells me that I should leave the money in traditional IRAs, take RMDs and not take the big tax hit, now or later; just let my heirs pay the taxes if there is anything left over. I believe that if I live another 20 years, God willing, I will be paying more taxes in the long run just from regular monthly income, interest income and RMDs. And be paying more taxes at a time when it will take more of my income to live on due to inflation. Also, when RMDs begin, should I have "surplus" money to invest, those investments will make me more taxable money. If I have it in Roth accounts it is still making money, but I can take out money only when I want and not have to worry about additional taxes. If I leave money for my heirs, that's great, but my main interest is taking care of myself over my lifetime. I am single, 66 ½ and will take the standard deduction this year (but not next). My AGI for 2006 will be about $73,700. I expect an annual income after retirement of about $70,

300. I have no debt. My cost of living is less than two-thirds of my current income. I have but 3 years to convert to Roths before RMDs begin. It would be a big tax hit in years 2007- 2010 to convert the new $264,000 (due at retirement) over to Roths, but I am thinking that I should convert at least part of that, and for sure the $21,000 IRA this year. Am I on the wrong track?

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Phil Marti · Accepted Answer

Since there's not a lot of time to do anything for 2006, I'd convert enough of the traditional to take you to the top of the 25% bracket now. Then sit down with a fee-based financial planner to figure out what to do in 2007 and out.

-- Phil Marti Clarksburg, MD

joetaxpayer · Answer

Your motives are good, but the results may be a wash. Currently, AGI over $74,200 is 28% money, and over $154,800 is 33%. My Roth conversion advice centers around 'topping off' the current bracket in an attempt to avoid getting forced into the next. An 80 yr old who has income (including RMD) of about $25,000. I advise her to convert just enough to get the taxable income right to $30,650 (the jump from 15% to

25%. Bottom line, she pays tax at 15% to avoid having ever increasing RMDs push her up to 25%. In your case, you look like you will be straddling the 28% bracket into retirement. If your heirs are in a lower bracket, they would be better off if you left the money pre tax. I missed one point - why will you not take the standard deduction next year? Besides the forced RMD at 70.5, is there some else happening you haven't spelled out? JOE JoeTaxpayer.com

Taxxcpa · Answer

I think you should begin converting part of your IRA each year provided you meet elegiblity to do so. If you contribute too much it could put you in a higher bracket, so incremental conversions may be best. Once the tax is paid, there will be no further tax to your heirs. Of course, when you convert to a Roth, part goes to taxes, but it reduces furure RMDs also. I've written some blogs about RMDs, Roth IRA and other related topics. The one for Roth IRAs is at

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A list of other topics will also be shown when you access the blog can it used, for the purpose of avoiding penalties

Arthur Kamlet · Answer

One additional item to be aware of, is if the conversionincome increases the cost of your Medicare premium, itbecomes sort of a hidden tax. __Art Kamlet     ArtKamlet @    Columbus OH    K2PZH

roth IRA conversion yes or no?

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