An elderly couple in their 80s holds $950,000 in traditional IRAs. Their pensions and Social Security total $110,000 a year and cover basic living expenses. They questioned why their adviser recommends Roth conversions at their age.
Roth conversions move money from a traditional IRA into a Roth IRA. The converted amount counts as taxable income in the year of conversion. Withdrawals from the Roth are then tax-free in retirement.
The couple’s fixed income already places them in a moderate tax bracket. A large conversion would push them into a higher bracket and raise their tax bill. Converting the full balance at once would likely trigger a significant tax hit.
Advisers often suggest partial conversions spread over several years. This approach can fill lower tax brackets without jumping to the next rate. It may reduce the tax burden on heirs who inherit the accounts.
Traditional IRAs pass to heirs who must withdraw the funds and pay income tax on distributions. Roth IRAs generally pass tax-free to heirs. Beneficiaries also face fewer withdrawal requirements on inherited Roth accounts.
The couple’s age and health shape whether conversions make sense. A conversion may not pay off if they need the money soon or face high current tax rates. Estate goals and heirs’ tax situations also matter.
The couple should ask their adviser for a written analysis of the tax impact. They should confirm the adviser’s fees for managing the conversion. A second opinion can help verify the recommendation fits their goals.
