Watch Out Boomers - Here Comes 70 (Bloomberg)

hank

"(Financial planner) Morrison recommends that clients start converting a portion of their traditional IRAs into Roth IRAs before age 70. Roth IRAs not only offer tax-free withdrawals but also have no RMDs. The IRS even lets you add money to a Roth account as long as you’re still working past 70. Roth conversions are taxable events themselves, but one could convert just enough each year prior to reaching 70 to keep from being bumped into a higher bracket."

Personally, some good opportunities presented themselves over the past decade to do just that. It's not a no-brainer. Good arguments can be made both ways. The up-front tax bite hurts. But it's nice entering RMD years with 60%+ in Roths.

http://www.bloomberg.com/news/articles/2016-03-24/watch-out-boomers-here-comes-70

bee

I also read somewhere that Roth 401(K)s do have RMD at 70.

Not technically a conversion, but another "strategy" to help reduce RMD at 70 would be to consider using Traditional IRA dollars to fund your H.S.A's (Health Savings Account) yearly contributions. These "IRA to H.S.A conversions" would be done between ages 59.5 - 65 for most and possibly as early as 55 for those who retire after age 55. The tax liability of the Traditional IRA distribution is effectively cancelled out by the tax credit for the H.S.A contribution.

Subsequent H.S.A distributions would tax free if used for healthcare related expenses or taxed as if it were in an IRA if distributed for non-health related reasons. I don't believe there are RMDs on H.S.As.

msf

Regarding Roth 401(k) RMDs, that's correct. Also inherited Roths are subject to RMDs (at an even faster rate than traditional IRAs).

If you have no income (not just wages, but investment income, etc.) then it makes sense to use traditional IRA distributions to fund HSAs. This is because there's no other place to get the money from (you have to have taxable income from somewhere to deduct).

But if you've got any income, it makes no difference from a tax perspective whether you say that the money came from your other income or from your IRA distribution. It seems advantage to fund that HSA regardless of the source of funds.

If you do get the funds from outside income, then have the IRA distribution available for a Roth conversion. You get the same HSA tax deduction (since it's the same HSA contribution either way), and you get to have more money sheltered (having contributed to both the HSA and the Roth IRA).

Note that this is completely different from using a one-in-a-lifetime transfer from an IRA to an HSA to fund the HSA. That helps you lower your IRA balance if you're below age 59.5 (no early withdrawal penalty). But if you've got any income, it's probably better contributing that to the HSA than doing the one-time IRA to HSA transfer.

bee

@msf, Good point: An H.S.A. income tax credit reduces any form of taxable income. Also, only earned income can be contributed to Traditional or Roth IRAs where as any income (earned or unearned) can be applied as a tax credit to fund an H.S.A.

From the perspective of lowering my RMD, I like the fact that I can lower my Traditional IRA account balance by making yearly distributions that move tax deferred dollars out of traditional IRA status and into tax free H.S.A. status without taxing those traditional IRA dollars.

It reduces future RMD and allows these future dollars to be treated either as taxable H.S.A. distributions or tax free healthcare related H.S.A. distributions.