Roth IRAs – (Q & A)

Jul 2018


Dear Rick:
I have a couple questions about Roth IRAs that I hope you can help me with. My situation is that I’m 72 years old. Last year I began taking minimum required distributions from my traditional IRA. I don’t really need the money so it was suggested to me that I take this year’s minimum required distribution and convert it into a Roth IRA. My first question is does this save me any money on taxes? Do I still have to pay taxes on the distribution? My second question is that since this year I will no longer be itemizing my deductions, I was told that it would make sense to make my charitable contributions directly from my Roth IRA. I want to make sure that you think that’s a good idea.

Thank you.

Dear Wayne:
Unfortunately, the advice you recieved is not accurate. First, you are not allowed to convert your minimum required distribution into a Roth IRA. You can convert anything above your minimum required distribution, but the minimum required distribution is not eligible for a Roth conversion.

I’m a big believer in Roth conversions and I think they make sense for lots of people. The rules I generally follow in recommending Roth conversions is first, you must have the money to pay the tax without touching the money you are converting. Remember, when you convert money from a traditional IRA into a Roth IRA, you do have to pay taxes on the distribution. Second, by converting the money, it will not throw you into a higher tax bracket. The new tax law changed brackets, so it is important to relook at your situation under the new tax law. My third rule is that you will not need the money for at least five to seven years. If you meet all three of those criteria, converting into a Roth IRA makes sense. However, once again, you cannot convert your minimum required distribution.

With regard to making charitable contributions through your Roth IRA, that is a strategy t I do not recommend and it does not make sense. Remember, whatever comes out of your Roth IRA is not subject to income tax; therefore, there’s no tax benefit to use your Roth IRA for charitable contributions. On the other hand, a much better strategy is to use your minimum required distribution from your traditional IRA to make a charitable contribution. By doing that you are avoiding the tax on the minimum required distribution. Therefore, since the great majority of people, because of the new tax law, will no longer be itemizing their deductions, by donating your minimum required distribution to a qualified charity, you are getting a tax break in the fact that you are avoiding the tax on the distribution.

For those who are charitable in nature and are at the age where they are required to take distributions from their IRA (over 70½), donating your minimum required distribution, or any portion thereof, is a very good strategy and one that I recommend people take advantage of. It is a very simple transaction to implement and it doesn’t affect the charity at all. The key to this transaction is to make sure the check is made payable to the charity and issued directly from the IRA custodian. The IRA custodian can send that check either directly to the charity or forward it to you for mailing.
I am a big fan of Roth IRAs and I recommend that more people take advantage of them. The beauty of Roth IRAs is they are not subject to the 70½ minimum required distribution rules and the fact that the money grows tax free. In other words, when you withdraw money from a Roth IRA, there are no tax consequences. Therefore, for seniors who are still working, a Roth IRA contribution is something you definitely should look into. In addition, if you are a younger person who is just starting out, I strongly recommend that you use a Roth IRA vs the traditional IRA. Yes, the traditional IRA will give you a current tax break; however, when you eventually withdraw the money, there will be substantial taxes owed. On the other hand, if you use a Roth IRA, you do not get the tax break upfront; however, when you withdraw the money your entire distribution is tax free. Personally, I would rather take a short-term hit for a long-term gain. Therefore, no matter how old or young you are, Roth IRAs are definitely something you should consider.

Good luck!



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