Tip of the Day: Consider Converting Your RMD to a Roth IRA
Tip of the Day: Consider Converting Your RMD to a Roth IRA
By: Stacey Nickens
If you have a retirement account, you will need to withdraw a certain amount of funds from it each year once you turn 72. This amount is called a Required Minimum Distribution (RMD). However, due to the CARES Act, no one has to take an RMD in 2020.
Knowing this, you could consider converting the amount of your RMD into a Roth IRA. Doing so could have a number of benefits for you and your family. For example, consider if your household income declined in 2020, perhaps due to COVID-19. If you’re still prepared to pay your normal tax bill in 2021, you could convert your RMD amount to a Roth IRA. The conversion amount would increase your taxable income; however, if your household income has already declined, then the increase may not create an unmanageable or unexpected tax bill. You could then pay taxes on your RMD amount now and have tax-free savings for later in retirement.
Additionally, Roth IRAs are not subject to RMDs. You can thus grow your tax-free money and only withdraw it when necessary. Roth IRAs are also an excellent gift to beneficiaries, such that they receive an inheritance without a tax bill.
Before converting your RMD amount to a Roth IRA, you should consider some of the implications. For one, as I said above, your taxable income will increase for 2020. Make sure that you can afford your tax bill come spring of next year.
Additionally, increasing your taxable income could also trigger or increase your Medicare premium surcharge. These surcharges are known as income-related monthly adjustments and begin accumulating once married couples reach an adjusted gross income of $174,001 ($87,001 for single filers). The surcharges increase at four more income levels after that: $218,001 ($109,001), $272,001 ($136,001), $326,001 ($163,001), and $750,000 ($500,000). In 2020, these surcharges range from $202.40 at the lowest income bracket to $491.60 at the highest income bracket. However, these surcharges won’t impact you until 2022. Income-related monthly adjustments are calculated based on your income two years prior.
With all of this in mind, considering a Roth conversion involves a lot of planning. You need to calculate your 2020 income and tax bill. You need to plan for a possible increase in your Medicare premium surcharge. You need to consider the kind of savings you need in retirement and want for your beneficiaries. If you would like to discuss your individual situation further, reach out. I can help you determine the best decision for you and your family.
