I am curious to see your thoughts on converting a Traditional Ira to a Roth at the age of 65. I have listened to both sides of the coin but I would like to hear the opinions from the DA community. With the rates at 5.05 apy 5 years, what do you think?
Answers
When you convert from a traditional IRA to a Roth, the amount converted is taxable. Since you are talking about being 65 at the time of the conversion, you'll want to keep an eye on the IRMAA limits as you can easily jump up to a higher IRMAA bracket, costing you a good chunk of change 2 years later.
You'll have to decide, do you want to withhold the tax from the conversion amount or do you pay the tax from other sources. If you easily have enough money available from other sources, I'd suggest the latter as that enables you to deposit more for growing tax free within your Roth. Obviously if you don't have enough elsewhere, you'll have to take the hit from the conversion amount.
Also keep in mind that, at 65, you have several years left before the RMDs kick in (at 73 currently) on your traditional IRA., so you don't have to do it all in one go, Tailor your conversion(s) to fit whatever tax and IRMAA brackets you are comfortable with.
For example, if you determine that 110k is your taxable sweet spot and you already have taxable income for the year of 75k, then you'll want to keep your conversion for that year to 35k or lower. Whereas if 90k is your sweet spot, then it would 15k or less in that scenario.
Secondly, the process of how one receives SS benefits led to easy implementation of taxation. The situation with IRAs, not so much. If people got even the first hint of a bill in Congress that would tax Roth withdrawals (causing double taxation, as you say), many would quickly and completely remove their funds from those IRAs before it became law.
By the way, "The taxation of Social Security began in 1984 following passage of a set of Amendments in 1983, which were signed into law by President Reagan in April 1983. These amendments passed the Congress in 1983 on an overwhelmingly bi-partisan vote."
If you have large sums in non-roth IRAs/401ks you are looking at huge RMDs. as such your tax bracket likely won't be zero just on the RMD money alone (then add in all your other income and the "lower tax bracket" you thought you would be in turns out to be a mirage). Then add in the IRMAA hit if/when the RMDs push you up the IRMAA brackets. In those circumstances it makes sense to move as much as you comfortably can into a Roth so that your post-RMD income remains in the lower brackets everyone dreams of having in retirement.
If the amounts in non-roth IRAs/401ks is small such that it won't materially impact your tax or IRMAA brackets (IE the dream of a lower tax bracket is your reality) then converting doesn't make as much sense.
In other words, once RMDs kick in, many retirees can kiss the idea of being in a lower tax bracket good-bye. The sweet spot for any potential conversions is in the years between retiring and RMDs kicking in, as those are likely the only years of "lower tax brackets" those with large 401k/IRA balances can expect if they don't convert.
"you neglected to say the impact of moving funds from IRA being taxable"
That money is taxable whether you put it into a Roth or "take it now ... and manage that" (as you so eloquently suggested) as such taxes paid and where from on the moved funds is a moot point. The relevant point is what do you do with it after you've taken that tax hit from moving it out of the traditional IRA: Invest it in a CD in the Roth (where the interest will be tax free) or invest it in a CD outside the Roth (where the interest will be taxed).