Roth Conversions at 80-Plus: Why an Adviser Might Still Push One

A retired couple in their 80s with roughly $950,000 in traditional IRAs recently wrote to a personal finance column with a question many readers will find counterintuitive: why would their adviser be pushing Roth conversions at this stage of life? Their income is already solid. Pensions and Social Security cover their basic living expenses, to the tune of $110,000 a year, so they are not drawing down savings to get by.

That detail is exactly why the idea deserves a closer look. A Roth conversion moves money from a traditional IRA into a Roth IRA and pays ordinary income tax on the amount moved in that tax year. In return, the converted money can grow tax-free, a Roth IRA has no required minimum distributions for the original owner, and heirs generally receive the balance without owing income tax on it. For a couple with a large traditional balance, the goal is often to lower the total tax their family pays over time rather than to fund their own spending.

Age, however, works against the strategy in several ways. Traditional IRA owners already must take required minimum distributions, which under current law start at 73, and a conversion cannot satisfy that requirement. The annual withdrawal has to come out first. Large conversions also raise taxable income, which can make more of a couple's Social Security benefits taxable and can push them into a higher Medicare premium bracket two years later. With a shorter time horizon, there are fewer years for tax-free growth to make up for the tax paid up front.

Whether the advice makes sense usually comes down to a few questions. Would the conversions fill a bracket that is currently low? Do the couple plans to leave the IRA to heirs? Is their tax rate likely to be higher or lower later? And where would the tax bill be paid from? Paying the tax with money from outside the IRA generally leaves more in the Roth. The couple's letter does not spell out the adviser's reasoning, so the recommendation cannot be judged on its own.

Anyone in a similar position should ask for the projected tax cost year by year, a side-by-side comparison with doing nothing, and an explanation of how the plan affects their estate and Medicare premiums. Sound advice should be able to show those numbers clearly.