I'm 69, Taking Social Security and Have $815k in My 401(k). Is It Too

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From a legal and regulatory standpoint, it is never too late for a Roth conversion. Under the rules, you can transfer retirement funds from a tax-deferred account such as a 401(k) to a Roth IRA at 69 or any other age. Whether it makes financial sense to do that is another matter. To determine this, consider first what your future tax rate is likely to be, since you may be better off not converting now if tax rates or your income go up much. Conversion may also impact Medicare premiums and estate plans, so it’s important to understand all the implications before you execute a strategy.

To get the full picture of the effects of a Roth conversion strategy on your finances, talk your situation over with a financial advisor.

A Roth conversion involves the transfer of funds from a 401(k) or other tax-deferred retirement savings account to a Roth IRA. The conversion requires paying taxes now at current income tax rates but allows you to take withdrawals from the Roth later on tax-free. Roth accounts are also exempt from Required Minimum Distribution (RMD) rules, so you won’t have to take taxable distributions after retirement and can continue to grow your full portfolio if you so choose. If you pass the Roth account on to your heirs, they will also be exempt from mandatory withdrawals for up to ten years after your estate is settled.

While Roth conversions offer some appealing advantages, they also have drawbacks. A major one is the need to pay income taxes on converted amounts on your next return. This can lead to a large current tax bill which can also have secondary effects.

Roth conversions can also hamper your withdrawal flexibility. That’s because you may owe a penalty on withdrawals taken within five years of the conversion date, depending on the circumstances. So it’s often advisable to only convert funds you won’t need for at least five years. A financial advisor can help you navigate the nuances of this and other rules, which may be affected by your age and circumstances.

Another issue is the difficulty of predicting your future tax rates. The current income tax environment features lower rates than at any time in recent history. It’s possible that rates will go even lower, however, and if they do it may make more sense to pay taxes on withdrawals later on than at today’s higher rates.

If your goal is to completely avoid RMDs, you have to completely empty your 401(k). Otherwise, the remaining balance will be subject to RMDs. However, it can make sense to convert only part of your 401(k) balance, so you’ll have some retirement funds in accounts that tax withdrawals and some in accounts with tax-free withdrawals. This can give you useful flexibility down the road for tax planning.

Many savers performing Roth conversions do the process gradually, converting a portion of the funds each year. This can help minimize the current tax impact while spreading it out over several years. However, even smaller conversions can push you into a higher tax bracket and hike your current tax bill. By increasing your income conversions can also lead to higher Medicare premiums, expose more of your Social Security benefits to taxation and make you ineligible for certain tax credits.

If you are a single filer with $100,000 in other taxable income, your income puts you in the 22% marginal tax rate for 2024 with indicated income tax bill of approximately $13,841. Converting the entire $815,000 in one transaction would put you in the top 37% federal 2024 marginal income tax bracket. This would lead to a one-time tax bill of about $289,486.

If you spread the conversion evenly over four years, doing $203,750 each year (which doesn’t account for potential growth on the portfolio in the meantime), the resulting $303,750 in taxable income each year would put you in the 35% bracket and generate an annual tax bill of approximately $71,577. That’s $57,736 higher than your taxes would be without the conversion. Over four years, assuming your other income and tax remain the same, this would result in a total added tax of $230,944 resulting from the four years of conversions. That’s a savings of $58,542 compared to the all-at-once conversion method.

A gradual conversion strategy like this would leave some funds in your 401(k), preserving some flexibility for later tax management. It would not expose more of your Social Security benefits to taxation, since the maximum 85% of these would already be taxable. It would likely cause your Medicare Part B premiums to rise significantly, however, and could affect the availability of some future tax credits.

Remember, this is a simplified example. A financial advisor can help you run the math 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 doable under the current conversion rules and regulations. It might improve future flexibility in managing taxes, and would allow you to pass your retirement savings on to heirs without saddling them with future RMD requirements and the tax implications of those. However, it would lead to a sizable current tax bill and, even if spread out over several years, would likely cause your Medicare premiums to rise during the years when you are performing the conversions.

Sit down with a financial advisor to get insight into how a conversion might affect your financial future. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors in your area, and you can interview your advisor matches at no cost 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 impacts of future financial moves.
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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The post I’m 69, Taking Social Security and Have $815k in My 401(k). Is It Too Late for a Roth Conversion? appeared first on SmartReads by SmartAsset.

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