Picture this: you’re 65 years old, still working and have around $400,000 saved in a traditional IRA. You’re healthy, active and don’t see yourself retiring anytime soon — maybe not until you’ve reached your 70s.
But at 65, you’re inching closer to the required minimum distributions (RMDs) that are enforced with your traditional IRA, which start at age 73. RMDs are mandatory annual withdrawals from retirement accounts that are enforced by the IRS, which means you must withdraw a certain amount from your traditional IRA every year once you turn 73.
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On top of that, withdrawals from traditional IRAs are taxed, which means the IRS will begin to take its cut of your retirement savings once you start making withdrawals. With this in mind, you can’t help but wonder — does it make sense to convert to a Roth IRA now and take the tax hit while you’re still earning an income?
Here’s what that might look like.
What’s the big deal about Roth IRAs?
Roth IRAs are retirement accounts that consist of money you’ve already paid taxes on. That means your money grows tax-free and withdrawals in retirement are tax-free, too.
Roth IRAs also have no RMDs, which means you’re not forced to make annual withdrawals and that money can continue to grow in the account. This makes Roth IRAs an attractive estate planning tool.
With a traditional IRA, the money grows tax-deferred and you pay ordinary income taxes when you take the money out. That can be a problem if those withdrawals push you into a higher tax bracket, or if you don’t need the money but are forced to take it out anyway.
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Converting $400K to a Roth and what it will cost you
Let’s say you’re earning $80,000 a year. If you were to convert the full $400,000 from your traditional IRA to a Roth IRA in one year, that entire amount would be added to your taxable income.
Here’s a rough breakdown using 2024 tax brackets:
- Current income: $80,000
- Full Roth conversion amount: $400,000
- Total taxable income for the year: $480,000
With the Roth conversion, your income will be bumped up from the 22% federal tax bracket ($47,151 – 100,525) to the 35% bracket ($243,726 – $609,350). And, depending on where you live, you could face a federal income tax bill north of $168,000 as well as state taxes.
This conversion could also trigger higher Medicare premiums due to the Income-Related Monthly Adjustment Amount (IRMMA).
Due to these financial concerns, full Roth conversions in a single year are quite rare, but there is another way to convert to a Roth IRA while limiting the tax implications.
The case for a partial Roth conversion
Rather than converting the entire $400,000 at once, many seniors opt for a partial Roth conversion over several years.
The idea is to convert just enough each year to stay within your desired tax bracket, just be aware that you’ll pay taxes on the amount that you convert to the Roth IRA each year.
Let’s go back to the tax-bracket model that we used above. Since you’re still working and earning $80,000, you might choose to convert $40,000 – $50,000 of your traditional IRA balance each year — just enough to stay within the 24% federal tax bracket, which currently tops out at $191,950 for single filers.
This strategy allows you to control your annual tax bill while gradually reducing the size of your traditional IRA and future RMDs.
Let’s run some quick “napkin math” for a $50,000 conversion:
- Current income: $80,000
- Conversion amount: $50,000
- Total taxable income: $130,000
- Estimated tax on conversion: ~$11,000 (depending on deductions and filing status)
If you repeat this strategy for five to six years, you could significantly reduce the size of your traditional IRA and increase the tax-free income available to you in retirement. You’ll also be setting up your heirs to inherit tax-free assets at the same time.
Who should consider a Roth conversion?
A partial Roth conversion can make sense if you expect to be in a higher tax bracket later because of RMDs, Social Security or other income. It’s also a smart move if you plan to leave money to heirs, since Roth IRAs pass on tax-free.
As always, a financial advisor or tax planner can help you figure out the right conversion strategy based on your goals, income and timeline. But the key takeaway here is that you don’t have to go all in with your Roth conversion. In fact, a little at a time might be just right for you.
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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
