Ask Bob: Is it Too Late for Me to Convert My IRA into a Roth IRA?

Financial planner Nancy Fellinger helps a reader decide how to evaluate whether a Roth IRA conversion makes financial sense.
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Question

How can I locate a financial planner in South Carolina? I am 64 years old and don't make much money. I still contribute 10% of my pay to a 401(k) and I also have a retirement account with a bank. Should I take either one and put the money in a Roth or is it too late?

Answer

To find an adviser in your area, Nancy Fellinger, an executive financial planner with Sensible Money, says there are two resources you could consider: https://www.napfa.org and https://www.xyplanningnetwork.com/. You would input your ZIP code into the search by location section to find someone near you.

Another great resource is https://www.garrettplanningnetwork.com/about/.

Over the past year, Fellinger says most advisers have had to provide clients with virtual meeting options, while many other advisers have been working with clients virtually very successfully for years. “You might consider that as a possibility, especially if no one in your area can offer the services you are seeking,” she says.

While a comprehensive plan is the best way to approach the wide range of questions and decision points that come with retirement planning, there are times when it can be very appropriate to get standalone advice on a particular topic, says Fellinger.

“In that instance, you might want an adviser who can provide the guidance you need and charge on an hourly or project basis,” Fellinger says. “Not all advisers are set up to work this way, so you’ll need to clarify how they are paid ahead of time.’

Now the question you’ve asked is very specific to your situation, and in the absence of a lot more information, it is hard to come with an answer that’s going to be right for you.

But there are several things you’d want to consider in making this decision, says Fellinger.

To make a Roth IRA contribution, you have to first consider earnings limits. If you’re single, your modified adjusted gross income (MAGI) must be under $139,000 for 2020 (you can still contribute for 2020 up until April 15) and under $140,000 for 2021. For couples, it’s under $206,000 for 2020 and $208,000 for 2021, says Fellinger.

As you are over 50, you can contribute the maximum of $6,000 plus an additional $1,000 in “catch up” contributions, for a total of $7,000. While this does not have to come from current income – for example, you can move money from a savings account to a Roth IRA – you do have to have at least $7,000 in earned income.

“If your employer offers the option for Roth 401k contributions, you could always elect to have some or all of your contribution applied to the Roth option over the tax-deductible traditional 401k plan,” says Fellinger. “If your employer has a match, those matching dollars will be applied to the traditional 401k. Making contributions to a Roth 401(k) means that you are not getting the benefit of the tax deduction you would get with a traditional 401k contribution, but the Roth dollars will not be taxable when you withdraw the funds later in retirement.”

Another way to build Roth IRA assets, says Fellinger, is through a Roth conversion, whereby you convert IRA assets into Roth IRA assets. “You’ll pay taxes on the conversion as though you were making a withdrawal from your IRA,” she says. “For example, if you convert $25,000 of IRA assets this year, you will now have another $25,000 of 2021 income for tax purposes. You pay the tax now, but in the future, you will not only have a tax-free account, but you will also not be required to take minimum distributions, RMDs, from that account.”

You would, of course, need to know the impact additional income could have on your current income taxes and whether paying the taxes now could result in lower taxes over time, says Fellinger.

As to whether it’s too late, it’s difficult to say. “It is not likely too late to be making Roth IRA contributions and Roth 401(k) contributions if that’s an option,” says Fellinger. “In the case of conversions, there is a “crossover point” where having paid the taxes earlier in exchange for no taxes later doesn’t make a lot of sense. This would require some analysis and a comparison of scenarios.”

Whether you will be in a lower tax bracket in retirement is a consideration as well. “If you will be, Roth conversions may not pay off as they would if you were in a lower bracket now and a higher one in retirement,” says Fellinger.

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