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From a legal and regulatory perspective, it is never too late for a Roth conversion. The rules allow you to transfer retirement funds from a tax-deferred account such as a 401(k) to a Roth IRA at age 69 or any other age. Whether it makes financial sense to do so is another matter. To determine this, first consider what your future tax rate is likely to be, as you may be better off not switching now if tax rates or your income rise much. Conversion can also affect Medicare premiums and estate plans, so it’s important to understand all the implications before implementing any strategy.
To get a full picture of the effects of a Roth conversion strategy on your finances, discuss your situation with a financial advisor.
A Roth conversion involves transferring money from a 401(k) or other tax-deferred retirement savings account to a Roth IRA. The conversion requires you to pay taxes now at current income tax rates, but you can take tax-free withdrawals from the Roth later. Roth accounts are also exempt from the Required Minimum Distribution (RMD) rules, so you don’t have to take taxable distributions in retirement and can continue to grow your entire portfolio if you want. If you pass the Roth account on to your heirs, they are also exempt from mandatory withdrawals for up to ten years after your estate is settled.
While Roth conversions offer some attractive benefits, they also have drawbacks. An important one is the need to pay income tax on the converted amounts on your next return. This can lead to a large ongoing tax bill, which can also have secondary effects.
Roth conversions can also hinder your withdrawal flexibility. Depending on the circumstances, you may be liable to pay a penalty for withdrawals made within five years of the conversion date. It is therefore often advisable to only convert money that you will not need for the next five years. A financial advisor can help you navigate the nuances of these and other rules, which may be affected by your age and circumstances.
Another problem is the difficulty of predicting your future tax rates. The current income tax environment has lower rates than at any time in recent history. However, it’s possible that rates could go even lower, and if so, it may make more sense to pay taxes on withdrawals later than at today’s higher rates.
If your goal is to avoid RMDs completely, you should completely drain your 401(k). Otherwise, the remaining balance will be subject to RMDs. However, it may make sense to convert only a portion of your 401(k) balance so that you have some retirement funds in accounts that allow tax-free withdrawals and some in accounts that allow tax-free withdrawals. This can provide you with useful flexibility when it comes to tax planning.
Many savers who make Roth conversions do the process gradually, converting a portion of the money each year. This can help minimize the current tax impact and spread it over several years. However, even smaller conversions can push you into a higher tax bracket and increase your current tax bill. Increasing your income conversions can also lead to higher Medicare premiums, expose more of your Social Security benefits to taxes and make you ineligible for certain tax credits.
If you are a single filer with $100,000 in other taxable income, your income will fall into the 22% marginal tax rate for 2024, with a declared income tax bill of approximately $13,841. Converting the entire $815,000 in one transaction puts you in the top 37% of federal income taxes for 2024. This would result in a one-time tax bill of approximately $289,486.
If you spread the conversion evenly over four years, making €203,750 each year (which doesn’t take into account potential portfolio growth in the meantime), the resulting €303,750 in taxable income per year would put you in the 35 bracket. % post and generate an income. annual tax bill of approximately $71,577. That’s $57,736 higher than your taxes would be without the conversion. Over a four-year period, assuming your other income and taxes remain the same, this would result in a total added tax of $230,944 due to the four years of conversions. That’s a savings of $58,542 compared to the all-in-one conversion method.
Such a gradual conversion strategy would leave some money in your 401(k), leaving some flexibility for later tax management. It would not expose more of your Social Security benefits to tax, as the maximum 85% of these would already be taxable. It would likely cause your Medicare Part B premiums to increase significantly, and could affect the availability of some future tax credits.
Remember that this is a simplified example. A financial advisor can help you carry out the calculations in your own situation. You can use this free tool to match with up to three vetted fiduciary advisors.
Converting an $815,000 401(k) to a Roth IRA at age 69 is possible under current conversion rules and regulations. It could increase future tax management flexibility and allow you to pass on your retirement savings to heirs without burdening them with future RMD requirements and their tax implications. However, it would result in a significant current tax bill and, even if spread over several years, would likely cause your Medicare premiums to increase in the years in which you make the conversions.
Talk to a financial advisor to understand how a conversion could impact your financial future. Finding a financial advisor does not have to be difficult. SmartAsset’s free tool matches you with up to three financial advisors in your area, and you can interview your advisors for free to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Use SmartAsset’s Federal Income Tax Calculator to help you model the potential tax effects of future financial movements.
Have an emergency fund on hand in case you encounter unexpected expenses. An emergency fund should be liquid – in an account that isn’t at risk of significant fluctuations like the stock market. The trade-off is that the value of liquid cash can be eroded by inflation. But with a high-interest account, you can earn compound interest. Compare savings accounts from these banks.
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The post I’m 69, take Social Security and have $815,000 in my 401(k). Is it too late for a Roth conversion? first appeared on SmartReads by SmartAsset.
