With retirees having longer lives today, the attractiveness of Roth IRA rollovers increases. That is due to the tax free nature of the Roth being more advantageous when the number of years of tax free growth increases. Additionally, retirees are typically in a "retirement tax bracket" making the tax of Roth IRA rollovers less painful.
While Roth IRA rollovers are attractive for those younger and for those working, there is a significant disincentive to pursue Roth IRA rollovers. that disincentive is the tax that must be paid upon conversion. The converted amount is added to one's earned income and the sum of those two could well push the worker into a higher tax bracket, making the Roth IRA rollover extremely expensive.
Nonetheless, you must weigh the advantages of tax-free treatment against the cost of the Roth IRA rollovers (in terms of the government income taxes paid about the converted amount).
Generally, you should only consider a post-retirement Roth IRA rollovers for those who have assets outside the traditional IRA to pay for the taxes on the amount rolled over amount. If funds in the IRA are needed to pay the tax, this makes the rollover uneconomical. Additionally, one must consider their current tax bracket and future tax bracket. If the tax today would be far greater than keeping a traditional IRA and paying tax on required minimum distributions, then the Roth IRA rollover again would be uneconomical.
If you convert a Roth IRA following age 70½, you must take one last required IRA minimum distribution from your pre-tax IRA for the year in which you complete the Roth IRA rollover.
Even though distributions from a Roth IRA rollovers typically come out tax-free after retirement, you must take into account five-year holding period to get total benefits. Please also observe that early distributions before age 59 ½ may be subject to penalty.
Lose a Fortune on Your 401k Rollover
If you do not do any of these correctly:
- Opt for a distribution rather than direct transfer
- Rollover company stock to an IRA
- Choose to rollover to a Roth IRA
- Rollover to your new employer’s 401k
- Rollover post-tax contributions