How Can I Do a Roth Conversion in Retirement If I Don’t Have Earned Income?

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In a previous article about Roth conversions, an advisor wrote: “For many folks, a prime time for Roth conversions takes place during the years after retirement but before Social Security and RMDs kick in. Those can be relatively low-income years during which initiating a conversion can result in a triple benefit. Those benefits are: lower tax bills, reduced RMDs and future tax-free growth.”

My question is based on what I thought the rules were for Roth contributions, which is that you must have earned income to contribute. How can a retiree roll funds into a Roth IRA without having any earned income?

– Mark

That’s a great question, and I get some variation of it often. Unfortunately, there is a lot of nuance to the rules surrounding Roth IRAs. The recent column on the five year rules highlights this point, too.

This can make following them more complicated and confusing than you might think. The answer to your specific question simply lies in understanding some subtle differences in terminology. While you need earned income to contribute to a Roth IRA directly, earned income isn’t required to convert a pre-tax account into a Roth IRA. (If you have similar questions surrounding retirement planning, consider working with a financial advisor.)

A retiree looks over his retirement accounts and contemplates doing a Roth conversion.

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To be clear, your understanding of the Roth contribution rules is spot on. Contributions must come from earned income. Therefore, a retiree who is only collecting Social Security, pensions, annuity payments, interest or taking distributions from retirement plans cannot contribute to a Roth IRA (or a traditional tax-deferred IRA for that matter).

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

When you make a Roth contribution, you take money that’s already been taxed and direct it into a Roth account. There, it will grow tax-free and won’t be subject to required minimum distributions (RMDs), which start at age 73 (75 for people who reach age 74 after Dec. 31, 2032). A Roth contribution can be made with money you receive from a paycheck or money that’s your checking account. The key is you need earned income in order to contribute to a Roth IRA.

A conversion, on the other hand, takes money that’s already inside a tax-deferred account and moves it over to a Roth account. The “conversion” occurs because you pay income taxes on the money when you move it into a Roth account.

In order to do a conversion you must first have money inside a tax-deferred retirement account of some type, like a traditional IRA or 401(k), for example.

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