Is It Too Late to Convert $1.2M in a 401(k) to a Roth IRA at Age 67?

Converting funds in a traditional 401(k) into a Roth IRA can provide you with tax-free retirement income, and there are no rule prohibiting conversion at any age. However, converting when you are close to or at retirement age involves some additional considerations. For one thing, you may have to let converted funds age for five years before you can withdraw without owing a penalty. Other issues include the likelihood of a sizable current income tax bill, plus possible effects on Social Security benefit taxation and availability of tax credits as well as charitable bequests and other aspects of estate planning. Let’s consider some overarching rules before diving into some specifics of this example.

A financial advisor can walk you through your options and provide insights into the various approaches. You can get matched with a financial advisor for free.

Tax rules allow you to transfer funds from a traditional 401(k) to a Roth IRA as long as you pay taxes at your current rate on any transferred funds. That means if you’re converting a large 401(k), you could get hit with a large tax bill. Some savers opt to do conversions anyway because Roth accounts allow for tax-free withdrawals in retirement and also are not subject to the Required Minimum Distribution (RMD) rules. Once in your Roth, you can leave funds there indefinitely, growing tax-free.

There are also strategies to manage and reduce the tax bill for a Roth conversion. The chief approach is to spread out conversions over several years so that your current income isn’t increased so much that it puts you in a much higher income tax bracket. However, there are a lot of moving parts in making this decision, so each case is assessed differently.

At 67, you are likely retired or near retirement. In six years, when you reach age 73, you’ll have to start taking RMDs. If you leave the $1.2 million in your IRA, in six years at 7% growth it will be worth $1.8 million. Your first-year RMD will come to approximately $68,000.

Assuming your taxable household income from Social Security and other sources still amounts to $60,000, this added income in retirement will move you from the 12% federal income tax bracket to the 22% bracket using the 2023 marginal income tax brackets for married taxpayers who file jointly.

If you won’t need the cash from the RMDs and you’d like to avoid the additional tax bill in retirement, you can convert your 401(k) into a Roth account. Then funds in the Roth won’t be subject to RMDs and any voluntary withdrawals you make will be tax-free. To get these benefits, however, you have to pay taxes now on any funds you convert.

If you convert the entire $1.2 million 401(k) immediately, this will increase your taxable income to approximately $1.26 million, placing you well within the top 37% bracket and incurring a current tax bill of approximately $385,865. A better way to go might be to convert the 401(k) gradually over time.

For instance, if you convert $130,000 each year, this will increase your current taxable income to $190,000, just below the threshold for moving from the 24% marginal tax bracket to the 32% tax bracket. You’ll pay about $26,000 per year, a much more manageable annual tax bill. After six years, you’ll have converted $780,000 into Roth funds not subject to RMDs and available for tax-free withdrawal.

Let’s say your 401(k) balance, including annual growth, will have then declined to about $898,000. With that much in your 401(k), your RMDs will be about $33,886. That amount of RMD income added to your taxable income from other sources, assuming future tax brackets adjust annually as they have in the past, potentially could allow you to remain in the 12% bracket.

Talk to a financial advisor who can help you make tax and conversion calculations based on your situation.

There are a number of other important considerations to keep in mind before launching a Roth conversion. One is that converted funds have to remain in the Roth for five years before being withdrawn or face a 10% penalty. This means you’ll need other sources of income to fund your retirement while you wait for the Roth funds to become available for penalty-free withdrawal.

You will also want to consider how increasing your current income by converting funds from the 401(k) to the Roth could impact the taxation of your Social Security benefits. Medicare premiums and tax credits can also be affected by increases in your taxable income during a Roth conversion process.

Estate planning can raise other issues. For instance, some savers who plan to leave funds to charities opt to leave all or part of their funds in a 401(k) rather than converting them to a Roth during their lifetimes because charities won’t owe taxes on bequests. On the other hand, if you want to leave a legacy to beneficiaries such as children, you may opt to do the Roth conversion, because they can take over the account on your death without passing it through probate.

Again, a financial advisor can help you navigate the nuances of laws that surround conversions, retirement and estate planning. Talk to a fiduciary advisor today.

Converting a $1.2-million 401(k) to a Roth account is a financial move worth considering at age 67. You’ll avoid having to take mandatory withdrawals of any converted funds, and can take voluntary withdrawals without owing taxes. Doing it in a single transaction may produce a tax bill that is larger than you want to pay, but a gradual conversion over time can reduce the total tax bill and split it into more manageable payments.

Making a good decision about converting 401(k) funds to a Roth account calls for modeling the likely outcomes of various scenarios. A financial advisor can help you with those models. 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.
Forecast the future amounts of mandatory withdrawals from your IRA or other pre-tax retirement savings account using SmartAsset’s Required Minimum Distribution calculator.
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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