Retirees, Reduce Your RMDs with a Roth Conversion

Start converting some money now from a traditional IRA to a Roth. The money can grow tax-free in the Roth, and you're not required to take minimum distributions from it.

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I turned 65 this year. I am retired and living on my pension. I will have to take required minimum distributions from my IRA when I turn 70 1/2. How should I reinvest the RMDs from my IRA to reduce the taxes on them in the future? --J.H., via e-mail

Rather than searching for low-tax investments once the money is out of the IRA, start converting some money now from the traditional IRA to a Roth. You'll have to pay taxes on the conversion, but the money can grow tax-free in the Roth, and you're not required to take minimum distributions from it.

When deciding how much to convert, be aware of the income thresholds for the Medicare Part B and Part D surcharge, which boosts premiums if your income tops $85,000 (for singles) or $170,000 (for joint filers). A large conversion in one year could also bump some money into the next tax bracket or cause more of your Social Security benefits to be taxed (see Are Your Social Security Benefits Taxable?).

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Kimberly Lankford
Contributing Editor, Kiplinger's Personal Finance

As the "Ask Kim" columnist for Kiplinger's Personal Finance, Lankford receives hundreds of personal finance questions from readers every month. She is the author of Rescue Your Financial Life (McGraw-Hill, 2003), The Insurance Maze: How You Can Save Money on Insurance -- and Still Get the Coverage You Need (Kaplan, 2006), Kiplinger's Ask Kim for Money Smart Solutions (Kaplan, 2007) and The Kiplinger/BBB Personal Finance Guide for Military Families. She is frequently featured as a financial expert on television and radio, including NBC's Today Show, CNN, CNBC and National Public Radio.