Situation:
I am retiring soon, a few months before I turn 59. For the first 3+ years, I plan to use after-tax money to supplement a small pension. By age 62 I will have to start withdrawing from my tax-deferred IRA (because after tax money will be exuasted by then except for an emergency fund) . My marginal federal tax rate in retirement will be 15% and I will be a long ways from hitting the 25% bracket. My state tax rate is approx. 5%
Proposed Strategy:
I do not currently have a Roth IRA. I am thinking that once I start withdrawing from my tax-deferred IRA at 62, I should open a Roth IRA account and withdraw an additional amount beyond what I need to supplement pension and social security for living expenses. The additional amount would be equal to the annual limit for a Roth contribution.
Is this allowed by the tax rules? That is, can I put a partial IRA withdrawal into a Roth, or does a Roth have to be funded from either earned income or a complete IRA conversion? (I couldn't find anything on Roth web sites that says whether this is allowed.) If it is not allowed, then there is no reason to read the rest of this note.
If it is allowed, then here is my rationale for doing it:
I will have to pay 15% + 5% extra tax on the additional withdrawal. (I would pay that tax with existing after-tax money.) But I will have to pay that tax sometime in the future anyway. I realize my total amount invested at any point in time would be less under this strategy (by the amount of the extra taxes paid, and any growth that money would have generated). But I am thinking that maybe the tax-free growth in the Roth would eventually offset that. As an added benefit, it would reduce the impact of RMD at 70 1/2 for the tax-deferred IRA since there would be less in it.
Do you think this is a sensible strategy? If so, I might even open a small Roth account now with after-tax money to get the 5 year clock started. Thanks.
Dale
I am retiring soon, a few months before I turn 59. For the first 3+ years, I plan to use after-tax money to supplement a small pension. By age 62 I will have to start withdrawing from my tax-deferred IRA (because after tax money will be exuasted by then except for an emergency fund) . My marginal federal tax rate in retirement will be 15% and I will be a long ways from hitting the 25% bracket. My state tax rate is approx. 5%
Proposed Strategy:
I do not currently have a Roth IRA. I am thinking that once I start withdrawing from my tax-deferred IRA at 62, I should open a Roth IRA account and withdraw an additional amount beyond what I need to supplement pension and social security for living expenses. The additional amount would be equal to the annual limit for a Roth contribution.
Is this allowed by the tax rules? That is, can I put a partial IRA withdrawal into a Roth, or does a Roth have to be funded from either earned income or a complete IRA conversion? (I couldn't find anything on Roth web sites that says whether this is allowed.) If it is not allowed, then there is no reason to read the rest of this note.
If it is allowed, then here is my rationale for doing it:
I will have to pay 15% + 5% extra tax on the additional withdrawal. (I would pay that tax with existing after-tax money.) But I will have to pay that tax sometime in the future anyway. I realize my total amount invested at any point in time would be less under this strategy (by the amount of the extra taxes paid, and any growth that money would have generated). But I am thinking that maybe the tax-free growth in the Roth would eventually offset that. As an added benefit, it would reduce the impact of RMD at 70 1/2 for the tax-deferred IRA since there would be less in it.
Do you think this is a sensible strategy? If so, I might even open a small Roth account now with after-tax money to get the 5 year clock started. Thanks.
Dale