I’m 58 With $1.7 Million in My 401(k). Should I Start Converting 10% per Year to a Roth IRA Now to Avoid RMDs and Taxes?
January 17, 2025
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Transferring retirement savings from a 401(k) or similar tax-deferred account to a Roth IRA can help keep you from having to make taxable withdrawals by the time your reach your mid 70s. This can reduce your tax burden after retiring, but it won’t necessarily save on taxes overall. That’s because any funds converted to a Roth are taxed as ordinary income at your current rate, which can lead to a steep tax bill due on your next return.
Conversion may still make sense if you expect to be in a higher tax bracket after retiring and reaching the mandatory withdrawal age, don’t need the RMD money, want to preserve wealth for your heirs or in other circumstances. But the most effective conversion strategy is likely not be based on converting a set percentage of your 401(k) each year. Rather, you may be better off calculating the conversion amount based on the effect on your tax bracket.
A financial advisor can help you assess the pros and cons of a Roth conversion strategy. Use this free tool to get matched today.
If you’re 58 now and leave your retirement savings in the 401(k), you’ll have to start taking required minimum distributions (RMDs) of pre-determined amounts each year starting at age 75. These withdrawals will be treated as taxable income, and the resulting tax bill will reduce the income you have available to pay living expenses in retirement.
You can convert funds from tax-deferred to tax-free by transferring them from a 401(k), IRA or other tax-deferred retirement savings account to a Roth IRA. Once in the Roth account, the funds are not subject to RMD rules, so you won’t have to worry about having to withdraw money you don’t need for living expenses.
If you do need the money you’ve saved for retirement, you can withdraw from Roth accounts without owing any taxes or penalties. The only limitation here is that you must wait at least five years after the conversion before making withdrawals if you make the conversion before you are age 59.5.
Roth conversions come at a cost, however, because the converted amounts will be treated like ordinary income on your current tax return. Converting a large 401(k) can, therefore, lead to a sizable tax bill in the short-term. With this in mind, many people doing conversions opt to do so gradually, converting a portion of the 401(k) year over several years to spread out the tax bill and prevent yourself from entering higher tax brackets where your money will be charged at higher rates.
The decision to convert a 401(k) to a Roth, and how much to convert, rests on several interdependent factors, including your current income and anticipated taxable income after retirement. It’s also worth keeping in mind the fact that Roth withdrawals are not considered when determining income levels that affect Social Security benefit taxation and Medicare premiums.
Remember, a financial advisor can help you determine and execute an appropriate strategy based on your circumstances.
If you are a relatively high earner with $100,000 in taxable income, you will likely be in the 22% marginal income tax bracket and would owe $13,841 in federal income tax on your 2024 return. Converting 10% of your $1.7-million 401(k) would add $170,000 to your current taxable income. As a single filer, the resulting $270,000 in income would lift you to the 35% bracket and result in a federal tax bill of approximately $59,754 for that year.
If you instead follow a strategy of converting only enough to lift you to the top of the next-highest bracket, you could convert $91,950. This would keep you in the 24% bracket and result in a current tax bill of $35,606.
Neither of these gradual conversion strategies would completely empty your 401(k) in 17 years, when you’ll reach age 75 and be subject to RMDs. So you’ll still have to take some taxable mandatory withdrawals, or you may have to bite the bullet and take on higher tax rates to convert the entire 401(k) in time. Ultimately, there are a lot of dynamics at play with your income and taxes over time. But given the difficulty of forecasting income tax rates and your own income that far in the future, it can make sense to have funds in a 401(k) as well as a Roth to provide you with flexibility.
Consider speaking with a financial advisor to further explore the tradeoffs for a Roth conversion based on your circumstances and goals.
Converting funds from a 401(k) to a Roth IRA can help you avoid RMDs and future taxes. However, the conversion will cost you today in the form of added income taxes. You may still want to do the conversion, especially if you think you’ll be in a higher tax bracket after retirement. However, a conversion strategy based converting just enough funds to lift your income the top of your current or the next-highest tax bracket is likely to make more sense than aiming to convert a set percentage each year.
Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Tax planning is a central part of almost any financial plan. Use SmartAsset’s Tax Return Calculator to estimate how much you’ll owe or be due in a refund on your next return.
Keep an emergency fund on hand in case you run into unexpected expenses. An emergency fund should be liquid — in an account that isn’t at risk of significant fluctuation like the stock market. The tradeoff is that the value of liquid cash can be eroded by inflation. But a high-interest account allows you to earn compound interest. Compare savings accounts from these banks.
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