Roth Conversion for Retirees

Making a decision about whether to convert a regular IRA to a Roth IRA can be extremely confusing. An often overlooked issue that adds to the confusion is the potential impact on whether future Social Security benefits might be subject to income tax.

One of the somewhat obscure tax traps that can hit Social Security (SS) recipients who have other income is the income tax on SS benefits. Depending on your income level and whether you are single (or are married and filing a joint return), you may have to include as much as 85% of your SS benefits in your taxable income.

So what does this have to do with a conversion of a regular IRA to a Roth IRA?

After making a conversion the income earned by the IRA and any distributions from the IRA would not be taxable. This could reduce the amount of SS benefits that is otherwise subject to income tax.

But bear in mind that the conversion results in adding the full amount of the IRA to your income over a two year period in 2010 and 2011. That is likely to push you into a top tax rate. For those already in or near the top rate, that might not make a difference. In any event, the government is eager to get more taxes now, rather than waiting until you retire and that's the main reason why this tax break was offered.

The conversion option is not available after this year.

For information on the income tax on SS benefits see http://www.ssa.gov/pubs/10035.html

For some information about Roth conversions see
http://www.money-zine.com/Financial-Planning/Retirement/Disadvantages-of-Roth-Conversions/

Your IRA trustee may also be able to help you with this decision.

Vern