Brenner answers questions about all aspects of family finance.
My wife is 711/2 years old. She has an IRA in a CD that will soon mature. Can she convert it to a Roth IRA to avoid the taxes this year? She doesn't have an income. Our joint yearly income is about $76,000, from Social Security, pensions and part-time employment.
A Roth IRA conversion wouldn't help you avoid taxes. Conversions are taxable.
First, let's clear up a possible misunderstanding. It sounds as if you assume the IRA will automatically become taxable when the CD matures. Not so! The CD is just a container. The contents — i.e., the IRA money — will still be tax-
deferred even after the CD matures. Your wife can move it into a new container — another CD or a mutual fund, for example — without triggering any taxes.
First however, it sounds as if she'll have to take a required minimum distribution, or RMD. (The deadline for your first required minimum distribution is April 1 of the year after you turn 701/2.) The RMD is based on your age and the total IRA balance. If this is her only IRA and it's worth $10,000, for example, her taxable RMD would be $377.
If she converts the $9,623 balance to a Roth IRA, it adds $9,623 to her taxable income. True, she has no other income. But you file a joint tax return — so a Roth conversion plus her RMD would add $10,000 to your joint income. To report the $10,000 as her sole income, you'd have to change your tax status to married filing separately. "That would probably make your own tax much higher, and end up costing more than if you'd filed a joint return," says Barry C. Picker, a Brooklyn tax accountant.
The bottom line Roth IRA conversions are taxable.
Websites with more information 1.usa.gov/L0mjAd and 1.usa.gov/MxkL1C