Is it smart to switch to Roth contributions at age 62 with $1.6 million saved?

By age 60, you’ll likely be paying close attention to your finances and saving for retirement. This can include making crucial decisions about your investment structure, risk tolerance, income needs and tax planning, among many other moving parts of your financial life.

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Some households may be considering whether they should switch to a Roth portfolio. Doing so can save you considerable tax in retirement, but it comes at the cost of paying higher taxes upfront. This is true whether you’re switching Roth contributions or converting existing savings to Roth funds. Here are some things to think about if you’re considering a pivot to a Roth account

Pivoting vs. Converting to a Roth

For working households with existing savings, you typically have two options for adding a Roth account to your retirement plan. You can either start contributing to a Roth account or roll over your entire pre-tax 401(k) into a Roth portfolio.

Pivoting your contributions means redirecting your annual savings—all or part—to a Roth portfolio. For example, you could contribute less to your 401(k) and put that money into a Roth IRA. Given the low limits on Roth IRA contributions, many households will only pivot a portion of their retirement savings and put the rest into other accounts.

Doing a Roth conversion means moving money that’s in a pre-tax account into a Roth IRA. There is no limit to how much money you can convert or how many conversions you are allowed in your lifetime. This makes conversions an effective loophole in Roth IRA contribution caps. (Note that the IRS limits you to one IRA rollover per year.)

In either case, you must have an existing Roth portfolio to fund. While your employer will manage a Roth 401(k), opening a Roth IRA requires finding a brokerage that offers this product.

You can then fund your new account with ongoing contributions or convert your pre-tax assets to Roth funds. In either case, the assets you put into the account must come from what’s called “earned income,” meaning you made that money through payment or compensation, rather than investment returns. A financial advisor can help you weigh the different options you have for saving for retirement, including Roth rolls.

Benefits of a Roth vs. before tax

The main difference between Roth accounts and pre-tax accounts is their tax treatment.

When you contribute to a pre-tax account, such as a traditional IRA or 401(k), you get a tax deduction for all contributions up to the program’s annual limit. In 2024, for example, an individual can contribute up to $30,500 in tax-deductible funds to a 401(k). This makes it cheaper to fund these accounts and gives households more capital to invest.

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But in retirement, you pay income tax on everything you withdraw from your account before taxes. This includes both principal and returns. Households can typically build larger portfolios with a pre-tax account, but keep less of what they withdraw.

With a Roth account, you don’t get any tax benefits on your contributions. You pay income tax on the money before it goes into your account. This makes funding these accounts more expensive, typically giving households less capital to invest. Note that this also applies to converted funds. If you transfer money from a pre-tax account to a Roth account, you must count the entire amount against taxable income for that year.

Until 59 ½, however, you pay no income tax on any of the money you withdraw from a Roth account. This includes both capital and returns, meaning a Roth portfolio generates tax-free returns over its lifetime. The result is that households can typically build smaller portfolios with a Roth account, but keep whatever they take.

Roth accounts also aren’t subject to required minimum distributions (RMDs) — required withdrawals that push your income higher and potentially drop you into a higher tax bracket. Consider working with a financial advisor if you need help planning your RMDs or managing your tax bills in retirement.

Should you pivot or convert?

Imagine you’re 62 and married with $1.6 million in 401(k)s that you’re still contributing to. Should you stop all pre-tax contributions and switch to Roth contributions? Should you do a Roth conversion instead? Or maybe you should sit and keep making pre-tax contributions?

The correct answer, of course, depends.

The general rule is that a Roth account is more valuable the more it grows because its earnings are completely tax-free. A Roth account is also more valuable when you pay a lower tax rate now compared to the rate you expect to pay in retirement.

A pre-tax account, on the other hand, is usually more valuable if you pay a higher tax rate today than the rate you’ll face in retirement.

The answer to the above questions may vary depending on what you expect your pension taxes to be. How much taxable income do you anticipate having each year and what will that mean for your marginal tax rate?

For example, if you’re currently in the 24% tax bracket, but anticipate moving into the 22% bracket in retirement, chances are you’ll forgo the Roth pivot and/or rollover and meet your pre-tax contributions. .

Although this is a simple example, your household has probably reached or is approaching maximum income by age 62, and chances are good that you will pay less in taxes once you retire. But review this carefully, ideally with a financial professional. With less time to grow and fewer tax benefits, a Roth pivot is less likely to benefit older households, but it all depends on your personal plans and tax situation. If you need help finding financial advice, this free tool can connect you with advisors serving your area.

Conclusion

For households approaching retirement, a Roth portfolio may be worth less than it would be earlier in life. Roth contributions are generally most valuable if you pay less in taxes today than you expect to pay in retirement. They are less valuable when you expect to lower your tax bill in retirement.

Roth Contribution Tips

• Not all provided Roth accounts are created equal. Depending on your brokerage, you will receive different services, investment opportunities and guidance. If you need help weighing your options, here are some Roth IRA providers you may want to consider.

• A financial advisor can help you build a comprehensive retirement plan and manage your Roth accounts. Finding a financial advisor doesn’t have to be difficult. The free SmartAsset tool matches you with up to three verified financial advisors serving your area, and you can have a free introductory call with your matched advisors to decide which one you think is right for you. If you’re ready to find an advisor who can help reach your financial goals, get started now.

• Keep an emergency fund handy in case you face unexpected expenses. An emergency fund should be liquid — in an account that isn’t exposed to significant fluctuations, such as the stock market. The trade-off 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.

• Are you a financial advisor looking to grow your business? SmartAsset AMP helps advisors connect with prospects and offers marketing automation solutions so you can spend more time converting. Learn more about SmartAsset AMP.

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