How Can I Do a Roth Conversion in Retirement If I Don’t Have Earned Income?

How Can I Do a Roth Conversion in Retirement If I Don’t Have Earned Income?

In a previous article on Roth conversions, one advisor wrote: “For many people, the prime time for Roth conversions is during the years after retirement, but before Social Security and Social Security take effect. RMD. a conversion can result in a triple benefit. These benefits are: reduced tax bills, reduced RMDs, and tax-free future growth.

My question is based on what I thought were the rules for Roth contributions, which is that you must have earned income to contribute. How can a retiree transfer funds into a Roth IRA without having any earned income?

– Brand

This is a great question, and I often get variations of it. Unfortunately, the rules surrounding Roth IRAs have many nuances. The recent column on the five year period also emphasizes this point.

This can make tracking them more complicated and confusing than you think. The answer to your specific question simply lies in understanding some subtle differences in terminology. Although you need earned income to contribute directly to a Roth IRA, earned income is not necessary to convert a pre-tax account to a Roth IRA. (If you have similar questions regarding retirement planning, consider working with a financial advisor.)

Roth contributions versus Roth conversions

How Can I Do a Roth Conversion in Retirement If I Don’t Have Earned Income?

A retiree reviews his retirement accounts and considers a Roth conversion.

To be clear, your understanding of the Roth contribution rules is perfect. Contributions must come from income earned. Consequently, a retiree who only receives Social SecurityPensions, annuity payments, interest, or distributions from retirement plans cannot contribute to a Roth IRA (or a traditional tax-deferred IRA for that matter).

But Roth conversions and Roth contributions are not the same thing.

When you make a Roth contribution, you take money already taxed and direct it into a Roth account. There it will grow tax-free and will not be subject to required minimum distributions (RMD), which begin at age 73 (age 75 for individuals who reach age 74 after December 31, 2032). A Roth contribution can be made with money you receive from a paycheck or with money you own. current account. The key is that you need earned income to contribute to a Roth IRA.

A conversion, on the other hand, takes money that’s already in a tax-deferred account and transfers it to a Roth account. The “conversion” happens because you pay taxes on the money when you roll it over to a Roth account.

To convert, you must first have money in a tax-deferred retirement account, like a traditional IRA or 401(k), for example.

In short, the source of a Roth contribution is earned income. The source of a Roth conversion is a tax-deferred retirement account. (Roth conversions are just one type of tax planning strategy that a Financial Advisor I might be able to help you.)

Boundaries

Although Roth contributions are limited in several ways, there are no limits on Roth conversions.

For fiscal year 2024, the Roth IRA contribution limit is $7,000 for those under 50 and $8,000 for those 50 and over. There is, however, no limit on the amount of money you are allowed to convert.

You’ll also want to keep income limits in mind. If your earned income is too high, you can’t contribute to a Roth IRA at all. In 2024, that limit is $161,000 for single filers and $240,000 if you’re married filing jointly.

Although not everyone can contribute directly to a Roth IRA, there are no income limits on Roth conversions. Bill Gates could do a Roth conversion if he wanted. (But if you need additional help navigating the rules surrounding Roth accounts, consider working with a Financial Advisor.)

Roth Accounts in Workplace Retirement Plans

Different rules govern Roth IRAs and Roth 401(k)s, including income and contribution limits.Different rules govern Roth IRAs and Roth 401(k)s, including income and contribution limits.

Different rules govern Roth IRAs and Roth 401(k)s, including income and contribution limits.

A related issue that often causes confusion is the treatment of Roth accounts in workplace retirement plans.)

Often, retirement savers believe that the same income restrictions that prevent them from contributing to a Roth IRA also prevent them from contributing to a Roth 401(b) or Roth IRA. Roth 403(b). However, this is not true. Roth IRA income limits do not apply to designated Roth accounts in workplace retirement plans.

As a result, a single person who earns more than $161,000 in 2024 could contribute up to $23,000 to a Roth 401(k), if their employer offers this account option. (If you need advice on how to split your retirement savings contributions between pre-tax and Roth accounts, consider discussing this with a fiduciary financial advisor.)

Conclusion

Roth contributions and Roth conversions are not the same thing and are not bound by the same rules. Any amount you convert will be included in your taxable income in the year of conversion, but eligible withdrawals will then be tax-free in the future. Roth conversions can be part of an effective tax planning strategy, but you shouldn’t do them without careful analysis.

Tips for Executing a Roth Conversion

  • Converting a large retirement savings balance to a Roth IRA at the same time can have serious tax implications. This is why you may want to consider a more gradual approach which allows you to convert your pre-tax savings into a Roth account over several years. This way, you can distribute taxation more equitably and potentially avoid moving to a higher level. tax bracket.

  • A financial advisor may be able to help you plan your Roth conversions. Finding a financial advisor doesn’t have to be difficult. The free SmartAsset tool find an advisor who can help you achieve your financial goals, start now.

Brandon Renfro, CFP®, is a financial planning columnist for SmartAsset and answers reader questions on topics related to personal finance and taxes. Do you have a question you would like answered? Email AskAnAdvisor@smartasset.com and your question may be answered in a future column.

Please note that Brandon is not an employee of SmartAsset and does not participate in SmartAsset AMP. He was paid for this article. Some reader-submitted questions are edited for clarity or brevity.

Photo credit: ©iStock.com/Cecilie_Arcurs, ©iStock.com/AndreyPopov

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