Roth Conversions in Your 80s: Do They Make Sense?

A couple in their 80s is questioning advice from their financial adviser to convert funds from traditional IRAs into Roth accounts, a strategy they describe as puzzling given their financial stability. The pair holds roughly $950,000 in traditional IRAs and receives $110,000 annually from pensions and Social Security — enough to cover their basic living expenses without touching retirement savings.

The skepticism is understandable on its surface. Roth conversions require paying income taxes on the converted amount in the year of the transaction, which can feel counterintuitive for retirees who no longer need the funds for day-to-day costs and may have limited years to recoup those upfront tax costs through tax-free growth.

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Yet financial advisers frequently recommend the strategy even late in retirement for reasons that extend beyond the account holder's own needs. Converting traditional IRA funds to Roth accounts can reduce the size of required minimum distributions, potentially lowering a retiree's taxable income in future years and reducing exposure to Medicare premium surcharges tied to income thresholds.

Perhaps more significantly, Roth accounts pass to heirs income-tax-free, whereas inherited traditional IRAs now come with a 10-year mandatory drawdown rule under current law — meaning adult children or other non-spouse beneficiaries could face substantial tax bills on large inherited balances. An adviser may be structuring conversions as a legacy and estate-planning tool as much as a personal retirement strategy.

Whether the approach is appropriate depends on the couple's current marginal tax bracket, the size of future required minimum distributions, and the tax situations of their intended heirs — factors that require individualized analysis. Continue reading at MarketWatch.com