Senior needs taxable income for Roth IRA


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Dear Senior Living Adviser,
I’m 76 years old. I get about $1,000 once a quarter from my rollover individual retirement account. The reality is that I don’t really need the money to live on. So, I’m thinking of moving the money into my Roth IRA, realizing that taxes need to be paid so that my money can grow without having to touch it.

There is about $104,000 in the rollover account. Would this be a wise move? Most of the stocks in the account involve companies paying cash dividends.

Thank you,
— Victor Vigor

Dear Victor,
For you to properly contribute to a Roth IRA, you must have taxable compensation. A distribution out of your IRA rollover account isn’t considered taxable compensation for the sole purpose of an IRA contribution. In other words, you can’t use the distribution to fund the Roth IRA unless you have other actual taxable compensation.

For 2014, the most that can be contributed to an IRA generally is the smaller of the following amounts: $6,500 (since you’re over age 50) or your taxable compensation for the year.

Seniors that don’t need the money from the required minimum distributions on a traditional IRA are tempted to convert some or all of that account balance to a Roth IRA, which has no mandatory minimum distribution while the account owner is alive. But the older someone becomes, the less sense such a conversion makes.

One expert suggests that for seniors over age 75, the benefit of a conversion involves estate planning. While you might perform a Roth IRA conversion to avoid a required minimum distribution for the current year, a Roth IRA conversion can help you avoid such required payouts as long as you are alive.

Since it is important to manage the tax consequences of these conversions, you might want to consider working with a tax professional to assist you with the process.

We hope you still have many productive and healthy years ahead of you. After your death, attention must be given to proper management of the funds. Then, the account beneficiary is subject to distribution requirements.

According to IRS Publication 590, “Generally, the entire interest in the Roth IRA must be distributed by the end of the fifth calendar year after the year of the owner’s death unless the interest is payable to a designated beneficiary over the life or life expectancy of the designated beneficiary.”

You can opt for the same investments in a Roth IRA that you owned in the traditional IRA. At issue is whether a conversion makes sense for you, either involving your tax situation or your estate planning goals.

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