The Roth Conversion Strategy Many Retirees Ignore Until It's Too Late
Key Points
Some retirees do Roth conversions over the course of a year or two.
A longer conversion window could save you from higher taxes and other consequences.
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If your retirement nest egg is sitting in a traditional IRA or 401(k), you may not want to keep things that way. Once you turn 73 or 75, depending on your year of birth, you'll be forced to start taking required minimum distributions (RMDs). Those could drive up your taxes, not to mention take away some of the control you have over your savings.
The good news is that if you're nearing or entering retirement with all of your money in a traditional IRA or 401(k), you're not stuck. Roth conversions allow you to move your savings into a Roth IRA.
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You'll pay taxes on the amount you move over. But from that point on, you can enjoy the benefits Roth IRAs have to offer. Those include tax-free gains and withdrawals, plus no RMDs.
But if you're going to do a Roth conversion, your timing matters. And one key strategy could spell the difference between a financially painful conversion and a smooth one.
It pays to spread your conversion out
You may be inclined to do your Roth conversion over the course of a year or two. And that may be fine if you're moving a relatively small balance. But if you have a $1 million IRA to convert to a Roth, moving that sum over in a short period of time could come back to bite you.
When you do a large Roth conversion, you risk getting bumped into a higher tax bracket. That could erode the benefit of doing a conversion in the first place.
A very large Roth conversion could have other tax consequences, too. If you're on Medicare or are about to enroll, a big conversion in any given year could lead to surcharges on your Part B and D premiums. That's because Roth conversions count as income the year you make them.
A better approach? Give yourself as many years as possible to do your Roth conversion. If your RMD year is 73 and you retire at 65, that's an eight-year window to move your savings into a Roth IRA.
And remember, you're allowed to do Roth conversions after RMDs begin. So if they start at 73 but you need a couple of more years to do a Roth conversion efficiently, you should have that option. You'll have to take your RMDs to avoid penalties, but once your conversion is complete, those mandatory withdrawals should go away.
Get moving to avoid a tax crunch
The more time you give yourself to do a Roth conversion, the more opportunity you should have to minimize the associated tax hit. So if you're thinking of moving your money into a Roth IRA, get the ball rolling once you determine doing so is the right choice for you.
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