Ask the Expert: Is Roth conversion sound?
When you're older and living on investments double-checking financial advice can mean the difference between snorkeling in exotic places, or just getting soaked. (Undated) Credit: Judi Dash
I'm 87 years old, and I retired in 1985. My wife and I take taxable distributions from our traditional IRAs every year. Can I use this money to invest in our Roth IRA? Fidelity Investments says this can only be done with current earnings. But I've read articles advising retirees to sell traditional IRAs, pay the taxes and move the money into Roth IRAs. Who's right?
Everyone. It's true that you can only contribute to a Roth IRA from current earnings. The articles you read were about Roth IRA conversions, which are subject to different rules. You can't contribute to a Roth IRA because you have no current earned income. But like everyone else, you do have the option to convert a traditional IRA into a Roth IRA.
Why would you do that? Well, as you say, distributions from a traditional IRA are taxable, while Roth IRA distributions are tax-free. But this isn't a no-brainer because you owe taxes on the amount you convert. So is it worth the price? In your case, only if you intend the Roth IRA for your heirs. A conversion only works financially if your tax-free Roth will earn enough to more than offset the tax you paid to create it. That's very unlikely unless you can 1) leave the account untouched for at least 10 to 15 years; and 2) pay the upfront tax from a non-retirement account. Let's say you convert a $50,000 traditional IRA, and owe $15,000 in federal and state taxes on the conversion. If you can pay the taxes from another account, you'll deposit $50,000 in the Roth. If you must pay the taxes from the IRA, you'll have only $35,000 to deposit in the Roth.
The bottom line Roth IRA conversions and Roth IRA contributions aren't governed by the same rules.
Websites with more information bit.ly/cy0bhS and bit.ly/gL6xl4
