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Longer Lifespans Strengthen Case for Roth Conversions 
Published June 01, 2015
Editor: Theodore J. Sarenski, CPA/PFS, CFP, AEP
Converting a traditional IRA to a Roth IRA can offer powerful benefits, but it requires consideration of several factors. While Roth conversions are more commonly a planning device for individuals still in their active earning years, the strategy may be valuable to retirees who have not fully considered the tax impact of required minimum distributions (RMDs) from their traditional IRA accounts.
While most CPAs advise against paying a tax today that can be deferred until tomorrow, Roth conversions can be the exception to this rule. The tax advantages of owning a Roth versus a traditional IRA make the case for a conversion compelling when future tax rates will be the same or higher than today's and a long time horizon is involved.
Since today's retirees are living much longer, longer post-retirement time horizons must be considered. According to data compiled by the Social Security Administration, about one out of every four 65-year-olds today will live past age 90, and one out of 10 will live past age 95.
Many CPA financial planners recommend that, when possible, clients take advantage of the 8% annual increase in benefits awarded to those who wait until age 70 to collect Social Security. For those who are retiring at their full retirement age (FRA) of 66 or 67 but may be waiting to collect until age 70, a Roth conversion is an attractive way to help stretch retirement dollars by smoothing out tax rates.
The advantages to retirees are:
  • Tax-free income from the Roth once the five-year holding requirement has been satisfied.
  • Flexibility in the timing of future income. RMDs are triggered on traditional IRAs at age 70½, but RMDs do not apply to Roth IRAs.
  • Potentially lower taxes on Social Security benefits, since qualified Roth IRA distributions are not included in income for purposes of calculating taxable Social Security benefits.
  • Reduced net investment income tax. Qualified Roth distributions are not included in either net investment income or in the modified adjusted gross income calculation for assessing the 3.8% net investment income tax.
Contact our office to discuss if you think this may benefit you.