I recently fielded this multi-part question;
First, is conversion from a traditional IRA to Roth IRA still OK when over 70 and taking RMDs (required minimum distributions)?
Ok? It’s fantastic!! I will first tell you that I believe that Roth’s value while working is slightly exaggerated. Your scenario above is ideal. I have an 80+ yr old client who is in the 15% bracket. Each year we convert just enough to ‘top off’ that bracket so the next hundred dollars would have been taxed at 25%.
Second, does the “conversion” count as part of RMD?
No, the conversion must take place after you calculate the RMD. Our RMD is based on 12/31/07 year end balance. We can do the Roth conversion any time during the year, but that RMD is fixed.
Third, is it possible to transfer stock directly from Traditional IRA to Roth IRA — using current valuation on day of transfer as the basis for amount of conversion?
Yes – you can convert stock, the broker will report that value based on the day of conversion. There is no wash sale selling in one IRA and buying in another, anyway.
Joe
Would you recommend that a 68 year old person transfer a significant amount of their traditional IRA to a Roth, to reduce future required distributions?
I’d suggest that you look at Fairmark.com to help you determine your current marginal tax bracket. Only convert enough to ‘top off’ that bracket, although if the IRA is pretty substantial, going from 25% to 28% isn’t that great a loss, but those who are in the 15% bracket really should avoid converting right into the 25% rate.
In scenario 1 above, we are confused. If the RMD has to be taken first, then you convert to a Roth after the RMD, wouldn’t you be significantly be adding to your tax due? Please clarify, the RMD cannot be rolled into a Roth and the tax paid, thus satisfying the requirement? Or there must be additional IRA tapped for the actual Rollover? Confused and the internet is fuzzy on this.
In my example here you take the RMD, do the math, and see if there’s ‘room’ to convert any IRA to Roth. The goal is to not get pushed into the next bracket. If you find you are pushed over that bracket at tax time, you can recharacterize a bit to back it out.
Here is is, 2017! According to the IRS, can I continue rolling over my tax-sheltered annuity (403b) into my rollover IRA, then complying with the 70.5 rule of required minimum distribution from both, and then converting some of the rollover IRA to the ROTH I have? The TSA won’t continue to rollover the year I turn 70.5; they’ll send it directly to me, and I guess I’d have to do an indirect rollover from my savings account… ?
Yes, you got it right. The TSA should honor your request for direct rollover. If they insist on sending you the money, keep in mind, they will probably be required to withhold 20% for federal tax and you will need to make up that difference when you deposit to your IRA. This is why I recommend the direct transfer.