February 2017: Roth Conversion & RMD Planning

Money Saving Tips
Why Convert a Roth IRA?

Investing in a traditional IRA while earning a paycheck is a good way to defer income taxes on the money you contribute. Currently, taxpayers who aren’t covered by a retirement plan at work may deduct the full amount of their annual contributions to a traditional IRA.7

Those who do participate in a work plan may be able to deduct partial contributions, subject to the following income limits:8


Filing Status Modified AGI Deduction Status
Single, Head of household,
or Married filing separately and did not live with spouse at any time during year
$61,000 or less Full deduction up to contribution limit
$61,000 to $70,999 Partial deduction
$71,000 or more No deduction
Married filing jointly
or Qualifying widow(er)
$98,000 or less Full deduction up to contribution limit
 $98,000 to $117,999   Partial deduction
 $118,000 or more  No deduction
Married filing separately Less than $10,000   Partial deduction
 $10,000 or more  No deduction


So, after years of contributing to a traditional IRA, why would anyone convert it to a Roth IRA before retiring? First of all, if you anticipate that income tax rates will increase in the future, you can avoid that bill on your retirement income by paying at a lower rate now. Second, some individuals make the conversion when they’re already retired and in a lower tax bracket. This could benefit their eventual beneficiaries who are in a higher tax bracket. However, converting may not be a good move if individuals or their beneficiaries expect to be in a lower tax bracket when the funds are distributed in the future.

The issue at hand is that contributions in a traditional IRA grow tax-deferred until distributed. Contributions to a Roth are taxed up front, grow tax-free and then are distributed tax free.9 So the decision to convert depends on when the individual expects to receive the funds and what tax bracket they expect to be in when that happens.

There are a few strategies a traditional IRA investor can use to help mitigate future tax bills. One is to make the conversion gradually, moving over just enough money each year to stay within the current tax bracket.10 Also, it may be worth considering converting before the investor turns 70 ½ to avoid having to take a taxable required minimum distribution (RMD) first.11

And finally, be aware that while traditional IRA RMDs begin at age 70 ½, an individual can convert the funds to a Roth IRA at any age thereafter. A Roth IRA does not require minimum annual distributions.12 

The content provided in this newsletter is designed to provide general information on the subjects covered. It is not, however, intended to provide specific legal or tax advice and cannot be used to avoid tax penalties or to promote, market or recommend any tax plan or arrangement. You are encouraged to consult your personal tax advisor or attorney. 

Planning Tip
RMDs and Charitable Contributions

A qualified charitable distribution is one that is not taxable. For 2017 and going forward, these distributions are an option for IRA owners age 70 ½ and up. If an individual instructs his or her IRA to make a distribution directly to a qualified charity, that amount can be deducted from the required minimum distribution (RMD) for the year.13

For example, if your RMD is $10,000, and you direct $7,000 to be paid out to a qualified charity, you need only withdraw (and pay taxes on) an additional $3,000 to meet your RMD quota for the year. Note, too, that the amount you contribute to a charity from an RMD cannot be claimed as a charitable deduction on your tax return.14 

This hypothetical example is for illustrative purposes only. This information is not intended to provide tax advice. Be sure to speak with a qualified professional about your unique situation. 

Content prepared by Kara Stefan Communications.
1 Gabrielle Emmanuel. NPR. Dec. 3, 2016. “Dyslexia: The Learning Disability That Must Not Be Named.” http://www.npr.org/sections/ed/2016/12/03/502601741/dyslexia-the-learning-disability-that-must-not-be-named. Accessed Dec. 19, 2016.
2 Gabrielle Emmanuel. NPR. Nov. 28, 2016. “Millions Have Dyslexia, Few Understand It.” http://www.npr.org/sections/ed/2016/11/28/502601662/millions-have-dyslexia-few-understand-it. Accessed Dec. 19, 2016.
3 Ibid.
4 Ibid.
5 Ibid.
6 Gabrielle Emmanuel. NPR. Dec. 3, 2016. “Dyslexia: The Learning Disability That Must Not Be Named.” http://www.npr.org/sections/ed/2016/12/03/502601741/dyslexia-the-learning-disability-that-must-not-be-named. Accessed Dec. 19, 2016.
7 IRS. Nov. 21, 2016. “IRA Deduction Limits.” https://www.irs.gov/retirement-plans/ira-deduction-limits. Accessed Dec. 30, 2016.
8 IRS. Nov. 21, 2016. “2016 IRA Contribution and Deduction Limits – Effect of Modified AGI on Deductible Contributions If You Are Covered by a Retirement Plan at Work.” https://www.irs.gov/retirement-plans/plan-participant-employee/2016-ira-contribution-and-deduction-limits-effect-of-modified-agi-on-deductible-contributions-if-you-are-covered-by-a-retirement-plan-at-work . Accessed Dec. 19, 2016.
9 CNN Money. “How is a Roth IRA different from a regular IRA?” http://money.cnn.com/retirement/guide/IRA_Roth.moneymag/index2.htm. Accessed Dec. 30, 2016.
10 Elizabeth O’Brien. Time. Nov. 14, 2016. “Is a Roth IRA Conversion Allowed When a Retiree Is Turning 70½?” http://time.com/money/4568635/roth-ira-conversion-year-turn-70-%C2%BD/. Accessed Dec. 19, 2016.
11 Ibid.
12 Ibid.
13 IRS. Nov. 21, 2016. “IRA FAQs – Distributions.” https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-iras-distributions-withdrawals. Accessed Dec. 19, 2016.
14 Ibid.
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