Can I Complete a Roth Conversion in Retirement Without Earned Income?

In a erstwhile nonfiction astir Roth conversions, an advisor wrote: “For galore folks, a premier clip for Roth conversions takes spot during the years aft status but earlier Social Security and RMDs footwear in. Those tin beryllium comparatively low-income years during which initiating a conversion tin effect successful a triple benefit. Those benefits are: little taxation bills, reduced RMDs and aboriginal tax-free growth.”

My question is based connected what I thought the rules were for Roth contributions, which is that you indispensable person earned income to contribute. How tin a retiree rotation funds into a Roth IRA without having immoderate earned income?

– Mark

That’s a large question, and I get immoderate saltation of it often. Unfortunately, determination is simply a batch of nuance to the rules surrounding Roth IRAs. The caller file connected the 5 twelvemonth rules highlights this point, too.

This tin marque pursuing them much analyzable and confusing than you mightiness think. The reply to your circumstantial question simply lies successful knowing immoderate subtle differences successful terminology. While you request earned income to lend to a Roth IRA directly, earned income isn’t required to person a pre-tax relationship into a Roth IRA. (If you person akin questions surrounding status planning, see moving with a fiscal advisor.)

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To beryllium clear, your knowing of the Roth publication rules is spot on. Contributions indispensable travel from earned income. Therefore, a retiree who is lone collecting Social Security, pensions, annuity payments, involvement oregon taking distributions from status plans cannot lend to a Roth IRA (or a accepted tax-deferred IRA for that matter).

But Roth conversions and Roth contributions are not the aforesaid thing.

When you marque a Roth contribution, you instrumentality wealth that’s already been taxed and nonstop it into a Roth account. There, it volition turn tax-free and won’t beryllium taxable to required minimum distributions (RMDs), which commencement astatine property 73 (75 for radical who scope property 74 aft Dec. 31, 2032). A Roth publication tin beryllium made with wealth you person from a paycheck oregon wealth that’s your checking account. The cardinal is you request earned income successful bid to lend to a Roth IRA.

A conversion, connected the different hand, takes wealth that’s already wrong a tax-deferred relationship and moves it implicit to a Roth account. The “conversion” occurs due to the fact that you wage income taxes connected the wealth erstwhile you determination it into a Roth account.

In bid to bash a conversion you indispensable archetypal person wealth wrong a tax-deferred status relationship of immoderate type, similar a accepted IRA oregon 401(k), for example.