Considering a Roth IRA Conversion at 65: Weighing the Pros and Cons
As a 65-year-old collecting Social Security, you may be wondering if it’s too late to convert your $750,000 traditional IRA into a Roth IRA. The good news is that there are no legal restrictions based on age or income. However, the decision requires careful consideration of tax implications, healthcare costs, estate planning, and more.
A Roth IRA conversion involves moving funds from a traditional, pre-tax IRA into an after-tax Roth IRA account. You’ll pay income tax on the converted amount now, but future withdrawals in retirement will be tax-free. Additionally, traditional IRAs are subject to required minimum distributions (RMDs) starting at age 73, which can lead to higher taxes in retirement.
Spreading conversions over multiple years often makes the most financial sense for larger IRAs. This approach can help reduce the tax owed each year and overall. It’s essential to consider when you’ll need to withdraw funds from your Roth IRA, as funds can’t be withdrawn without penalty within five years of the conversion.
Meeting with a financial advisor can provide clarity on complex moves like Roth conversions. A major concern is the significant tax bill that would accompany a large conversion. Converting a $750,000 IRA balance at once could push you into the 37% marginal tax bracket, resulting in a substantial tax bill.
A more strategic approach is to convert smaller amounts over time, keeping your taxable income in a lower bracket. For example, converting $75,000 per year over 10 years would reduce the tax hit each year. This approach also allows you to take advantage of tax-free growth in your Roth IRA.
Factors to consider when deciding on a Roth conversion include:
* Comparing current vs. future income tax rates
* Accounting for RMDs and estate plans
* Weighing healthcare and other senior costs
* Assessing tax impact on heirs
* Modeling multi-year scenarios
Strategic partial Roth conversions tailored to your situation may provide the most tax advantages for people with large IRA balances. However, it’s essential to do a thorough multi-year analysis before committing to convert, as Roth conversions cannot be reversed.
If you’re unsure about the best approach for your situation, consider speaking with a financial advisor who can help you crunch the numbers and make an informed decision.
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