7 Roth Conversion Errors That Can Drain Retirees’ Savings

Quick Read

• The IRS treats all traditional, SEP, and SIMPLE IRAs as a single pool, so you cannot choose to convert only the after-tax portion.

• A couple converting $50,000 on top of $200,000 in MAGI can face nearly $1,949 in additional Medicare Part B costs by moving into a higher IRMAA bracket.

• Because Roth conversions cannot be reversed, a market decline after the conversion still leaves taxes due on the full amount originally converted.

A Roth conversion is one of the few tax moves retirees can still control from year to year, but it is also easy to misjudge. Many of the biggest mistakes involve rules outside the conversion itself: how IRA balances are aggregated, Medicare premium thresholds, taxation of Social Security benefits, and deadlines that leave little room to correct an error. Here are seven of the most costly pitfalls, along with examples of who they affect and how to avoid them.

1. Overlooking the Pro-Rata Rule Can Make Taxable Money Seem Tax-Free

When the IRS calculates the tax on an IRA distribution, it treats all individual retirement accounts as one combined pool and looks at their value at the end of the calendar year (IRC Section 408(d)(2)). That means you cannot convert only your after-tax dollars.

------

Learn 7 Ways To Generate Income With A $1,000,000+ Portfolio

If you’ve saved over $1,000,000, this guide is for you. The last thing you want in retirement is to run out of money, you want your money to generate lasting income while you enjoy your life.

Now you can learn the strategies wealthy retirees use to fund their retirement with The Definitive Guide to Retirement Income from Fisher Investments. Download the guide today! (sponsor)

------

2. Paying the Conversion Tax From the IRA Can Be Costly for Younger Retirees

3. Converting Before Taking an RMD Can Violate the Rules

4. Moving Into an IRMAA Bracket Can Increase Medicare Premiums

5. Added Income Can Make More of Your Social Security Taxable

6. Assuming a Conversion Can Be Reversed Leaves No Escape Hatch

7. Converting Too Much in One Year Can Push Income Into Higher Brackets

Weigh the Tax Impact Before the Year Ends

Conversions tend to make the most sense for people whose current tax bracket is lower than the one they expect to face later, who can pay the tax with money outside the IRA, and who have enough years left for the Roth account to grow. The period between a final paycheck and the first required withdrawal is often the best time to convert, which is the focus of our free Roth guide. They often are not a good fit for:

• People who would need to use IRA money to cover the tax bill

• Retirees who are close to an IRMAA or Social Security threshold

• Anyone who expects a lower bracket later or plans to leave the IRA to charity

• People who will need the funds within a few years

Roth IRAs do not require distributions during the owner’s lifetime, which can make them useful in estate planning. But that advantage only holds if the tax cost was considered before the conversion paperwork was signed.

Learn 7 Ways To Generate Income With A $1,000,000+ Portfolio

If you’ve saved over $1,000,000, this guide is for you. The last thing you want in retirement is to run out of money, you want your money to generate lasting income while you enjoy your life.

Now you can learn the strategies wealthy retirees use to fund their retirement with The Definitive Guide to Retirement Income from Fisher Investments. Download the guide today! (sponsor)