Atlanta, Georgia – A 62-year-old individual who has amassed $1.5 million in a traditional IRA may be considering the option of converting $150,000 per year into a Roth IRA in order to avoid required minimum distributions (RMDs), which are mandated annual withdrawals that can increase taxes in retirement.
RMDs are required by the IRS from IRAs, 401(k)s, and other tax-deferred retirement accounts, typically starting at the age of 73. However, strategic Roth conversions can help distribute RMD-susceptible IRA funds into accounts that are not subject to RMDs, thus potentially reducing overall lifetime taxes and providing more predictability. It is advisable to consult with a financial advisor to receive personalized guidance on retirement planning strategies tailored to individual situations.
While converting funds from a traditional IRA to a Roth IRA will require paying taxes at the time of conversion, it can result in lower overall lifetime taxes compared to unpredictable RMDs in the future. It is important to carefully consider the tax implications of such conversions and to develop a strategy that aligns with one’s current income tax bracket.
In addition to tax considerations, it is crucial to understand that Roth IRA conversions may impact future access to funds. Withdrawals from a Roth IRA may not be tax-free until five years after the initial contributions were made, and early withdrawals may incur penalties for individuals younger than 59.5 years old.
It is recommended for individuals to connect with a financial advisor to assess the tradeoffs, optimize the timing of potential Roth IRA conversions, and develop a conversion strategy that takes into account various factors such as deductions, state taxes, investment returns, and other sources of income.
Overall, strategic Roth IRA conversions can potentially reduce overall taxes in retirement, but they also come with risks and limitations that individuals should carefully consider before making any decisions. Research and consultation with a financial professional can provide valuable insights and guidance in navigating the complexities of retirement planning and tax implications.
Connect with a financial advisor to quantify the tradeoffs and optimize the timing of potential Roth IRA conversions. SmartAsset’s free tool matches individuals with up to three vetted financial advisors who can provide personalized guidance based on individual circumstances. A retirement calculator is also available to estimate savings and track progress towards financial goals.