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retirement

Converting a Traditional IRA to a Roth in Retirement

You can convert money to a Roth no matter how old you are. But if the conversion boosts your income, it could have taxing consequences.

I read your article about contributing to an IRA after age 70½. I know I can’t contribute to a traditional IRA at that age, but can I still roll over money from a traditional IRA to a Roth? Do I need to have earned income?

There's no age limit or income requirement to be able to convert a traditional IRA to a Roth. You must pay taxes on the amount converted, although part of the conversion will be tax-free if you have made nondeductible contributions to your traditional IRA. Once the money is in the Roth, you'll be able to take tax-free withdrawals (you may have to pay taxes on any earnings withdrawn within five years of the conversion, but only after you've withdrawn contributions and converted amounts). See Tax Rules for Roth Withdrawals for more information.

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Be careful before making a big conversion in one year, however, because it can have a ripple effect on other areas of your finances. The conversion will be included in your adjusted gross income, which could bump some of your income into a higher tax bracket and could also cause you to pay more for your Medicare premiums and higher taxes on your Social Security benefits.

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If your adjusted gross income (plus tax-exempt interest income) is more than $85,000 if you're single or $170,000 if married filing jointly, you will have to pay the Medicare high-income surcharge. In 2016, people subject to the surcharge pay $170.50 to $389.80 per person each month, depending on their income, for Medicare Part B premiums. They also pay a high-income surcharge of $12.70 to $72.90 above their Part D premiums. See Medicare Part B Premiums in 2016 for more information.

The extra income from the conversion could also increase the portion of your Social Security benefits that is subject to income taxes. See Do You Have to Pay Taxes on Social Security Benefits? for details.

Also keep in mind that rolling money over from a traditional IRA to a Roth after 70½ won't reduce your RMD for the year of the conversion; the required withdrawal is based on your IRA balance as of the end of the previous year. But it can reduce your RMDs for future years. Instead of making one big conversion, consider rolling over a portion of the money from a traditional IRA to a Roth every year, with a close eye on the top of your tax bracket and income limits for the Medicare high-income surcharge and Social Security taxes.

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