Author Topic: Moving money into Roth from RO IRA with no other earned income  (Read 605 times)

OzzieandHarriet

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I wasn't sure where to ask this question, but thought I'd try the post-FIRE people.

Basically, I want to make sure it's legally okay to move money from a tax-advantaged retirement account into a Roth when you have no earned income.

DH and I are both retired, ages 61 and 63, and we have started drawing living expenses from our retirement accounts, which are RO IRAs. We've been putting those withdrawals into a money market account and holding about 2 years' expenses there, moving money into our checking account as needed, but I've been thinking it would be good to move some of the IRA withdrawals directly into our Roth IRAs instead so we will have a bigger stash that doesn't require RMDs (looking at 70-1/2 uncomfortably soon).

I know that yes, you can do this and you will have to pay taxes on the withdrawals (fine), but I want to make sure you don't have to be working and have earned income in the tax year when you do the transaction. I don't want to get hit with some kind of penalty. I've searched quite a bit and can't find an answer to this specific question. I'm going to call the financial institution to ask them, but it's a long wait to get through right now. (DH called them yesterday and --- grrr --- didn't ask this question.)

TIA

terran

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Re: Moving money into Roth from RO IRA with no other earned income
« Reply #1 on: May 06, 2021, 09:46:36 AM »
RO = rollover?

Yes, it's perfectly fine to convert traditional IRA balances to Roth regardless of other income. Making contributions to an IRA is the only thing that requires earned income.

RMDs now start at age 72 and there's even some talk of pushing it out to 75 (not that it really changes anything other than giving you more time).

Generally your goal should be to keep your tax bracket as even as possible throughout retirement as spiking into a higher tax bracket in some years means you're paying higher taxes overall than if you can keep all withdrawals in the same bracket. Remember to consider the effect on ACA subsidies if that's how you're getting health insurance. Assuming you're holding off on social security until 70.5 then the time between when medicare starts at 65 and when you start taking social security is likely your best time to make the largest Roth conversions.

yachi

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Re: Moving money into Roth from RO IRA with no other earned income
« Reply #2 on: May 06, 2021, 12:00:20 PM »
Yes, members do it all the time.  This is one of the keys of the Roth Conversion ladder that early retirees are using to access funds before 59 1/2. 

bacchi

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Re: Moving money into Roth from RO IRA with no other earned income
« Reply #3 on: May 06, 2021, 12:55:09 PM »
Assuming you're holding off on social security until 70.5 then the time between when medicare starts at 65 and when you start taking social security is likely your best time to make the largest Roth conversions.

Why is this? Because the medicare premium increase isn't as steep as the ACA?


terran

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Re: Moving money into Roth from RO IRA with no other earned income
« Reply #4 on: May 06, 2021, 01:26:26 PM »
Assuming you're holding off on social security until 70.5 then the time between when medicare starts at 65 and when you start taking social security is likely your best time to make the largest Roth conversions.

Why is this? Because the medicare premium increase isn't as steep as the ACA?

Right, Medicare premiums have an Income-Related Monthly Adjustment Amount (IRMAA) that adds an extra charge for those with a single/married income (AGI + muni bond interest) over $88k/$176k, which is much higher than the income at which ACA premium subsidies are reduced or completely go away other than the 2 year moratorium on the subsidy cliff that we're in now. Here's a good writeup with more details and here are the 2021 premiums at various income levels.

Something to note that I'd forgotten about is that IRMAA is based on your income from 2 years ago, so for OzzieandHarriet, now and for the next 4 years would be an especially bad time to have an AGI over $176k since that would both reduce (probably eliminate) ACA subsidies in the current year, and increase medicare premiums as the 63 year old and then the 61 year old become medicare eligible 2 years later.

OzzieandHarriet

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Re: Moving money into Roth from RO IRA with no other earned income
« Reply #5 on: May 06, 2021, 04:38:53 PM »
Thanks, terran. So Iím thinking it would be a good idea to shift some money, but not too much, into the Roths every year from now on.

MDM

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Re: Moving money into Roth from RO IRA with no other earned income
« Reply #6 on: May 06, 2021, 07:00:10 PM »
So Iím thinking it would be a good idea to shift some money, but not too much, into the Roths every year from now on.
If you want ideas on how much to shift, the case study spreadsheet can show you the marginal tax rates you'll pay on various contribution amounts.