At 65 and on Social Security-Can I still do a Roth conversion with $750,000?

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If you’re 65 and collecting Social Security, you may be wondering if it’s too late to convert your $750,000 traditional IRA to a Roth IRA. The short answer is no – there are no legal restrictions on Roth conversion based on age or income. Practically, however, the decision involves careful weighing of tax implications, healthcare costs, succession planning and more. Spreading out conversions over several years often makes the best financial sense for larger IRAs. The guidance of a financial advisor can help you weigh the costs of a Roth conversion in your circumstances.

Roth conversion basics

A Roth IRA conversion involves moving funds from a traditional, pre-tax IRA to an after-tax Roth IRA account. You pay income tax on the money that is converted now, but future retirement withdrawals are tax-free.

In addition, traditional IRAs are subject to required minimum distributions (RMDs) beginning at age 73. This can lead to higher taxes in retirement because RMD income, which is treated as ordinary taxable income, can push retirees into higher tax brackets. But the RMD rules don’t apply to Roth IRAs and Roth 401(k)s, so you can leave the money in the account or withdraw it whenever you need without owing taxes on the contributions (you may owe income taxes on the investments). earnings if you withdraw them less than five years after making the initial contribution).

If you need additional help navigating the rules surrounding Roth IRAs, consider talking to a financial advisor.

Why Timing Your Roth Conversion Matters

The sooner you convert your pre-tax traditional IRA funds into a Roth account, the more years of tax-free growth you’ll enjoy in your Roth account. And you’ll be able to withdraw those Roth funds without owing taxes.

But you’ll have to pay conversion fees, which is no small consideration when it comes to syncing. Converting a large IRA may require you to pay the top marginal tax rate of 37% on most or even all of the conversion amount, depending on your other income, deductions and additional factors.

If you convert it gradually, however, you can spread the increase in income over several years and avoid subjecting it to the top marginal tax rate. This can help reduce the tax owed each year and overall.

It’s also important to consider when you’ll need to withdraw funds from your Roth IRA. Funds cannot be withdrawn without penalty within five years of conversion. And, if you convert your IRA to a Roth gradually over time, those conversions reactivate each five-year rule for that portion of the money.

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Meeting with a financial advisor can provide clarity on complex moves like Roth conversions.

Conversion of a $750,000 IRA

A major concern in converting a $750,000 IRA balance all at once would be the significant tax bill that would accompany such a transaction. A full Roth conversion of this size would push the individual into the 37% marginal tax bracket.

If you’re a single filer and your Social Security income isn’t high enough to be taxed, adding $750,000 to your current income could result in about $238,000 in extra taxes using the 2023 tax brackets. Going slow with $75,000 converted per year over 10 years, reduce your tax impact each year, keeping your taxable income in the 22% range.

Here’s how these scenarios might play out, assuming you’re a single filer and your Social Security income is less than $25,000, so it escapes taxation:

Scenario 1: Converting $750,000 at once

• Roth Conversion Size: $750,000

• Tax category: 37%

• Total federal income tax DUE: $237,831

This option leaves you with a massive tax bill, but around $512,000 in your new Roth IRA that you’ll eventually be able to withdraw tax-free.

Scenario 2: Annual conversions of $75,000 over 10 years

• Roth Conversion Size: $75,000 (x10)

• Tax category: 22%

• Total federal income tax DUE: $88,000 over 10 years

Keep in mind that the funds left in your IRA will continue to grow as you perform these annual conversions, so your IRA likely won’t be empty by the time you need to start taking RMDs. However, the RMDs you’ll have to take until then will be much smaller, so they won’t be nearly as taxed compared to leaving the money in a traditional IRA.

A third option is to leave the money unconverted in the IRA and start taking RMDs after you turn 73, paying taxes on them as you go. However, this can leave you paying higher taxes in retirement until you die. But if you need more help weighing up the different options, this free matching tool can match you up with a fiduciary advisor .

Making the Call

You may not find that one course of action is clearly superior. Factors to consider when deciding whether and how much of a Roth conversion makes sense:

• Compare current and future income tax rates

• Contains RMDs and estate plans

• Weigh health care and other costs for seniors

• Assess the tax impact on the heirs

• Model of multi-year scenarios

Strategic partial Roth conversions tailored to your situation can provide the most tax advantages for people with large IRA balances.

A major limitation of Roth conversions is that they cannot be reversed. If tax rates drop later, or if you need converted funds sooner, you may regret locking in taxes now at a higher rate. Succession plans can also change. Do a thorough multi-year analysis before committing to convert.

Run your own Roth conversion scenarios first, or enlist the help of a financial advisor to help you make these important calculations.

Conclusion

At 65, or at any age while some of your retirement finances remain unresolved, limiting Roth conversions to small chunks spread out over the years provides flexibility. This balances immediate tax costs with future tax savings for you and your heirs. As with most retirement money movements, prudent assessment of the fiscal picture over several years is essential.

Retirement Planning Tips

• Instead of guessing whether an IRA conversion makes sense, talk to a financial advisor who can crunch the numbers. 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.

• Note that there are income limitations for contributing to a Roth IRA. In 2024, the IRS disallows single filers with an adjusted gross income (AGI) over $87,000 and married couples filing jointly with an AGI over $240,000. However, backdoor Roth IRAs can help high earners legally avoid these income limits.

• 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 provides marketing automation solutions so you can spend more time converting. Learn more about SmartAsset AMP.

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