It always hits our clients at some point after age 50. Retirement is no longer a mirage off in the distance—it’s a real event that’s coming into sharper focus.
With that clarity comes new questions about turning retirement savings into retirement income.
The decade or so before retirement is critical because it’s your best chance to manage taxes now and in the future, particularly when required minimum distributions (RMDs) kick in at age 72.
If you’ve saved a lot in an IRA, then you’re going to have to take big RMDs and potentially pay high taxes on those withdrawals.
The reality, of course, is that we all pay taxes. But you shouldn’t pay any more than necessary.
That’s why we often suggest transferring some of your traditional IRA savings into a Roth IRA with a Roth conversion. In this article, we’ll cover what a partial Roth conversion is, the potential tax benefits associated, and cover some examples.
But first, let’s dig in a bit on required minimum distributions:
Retirement funds cannot remain in the accounts indefinitely. The IRS begins requiring distributions at age 72 (or 73 if you reach 72 in 2023 or later.)
Required minimum distributions apply to traditional, SEP, and SIMPLE IRAs, as well as 401(k), 403(b), and 457(b) plans. RMDs do not apply to Roth IRA accounts.
Annual RMD amounts are calculated based on the account balance at the end of the prior year divided by your life expectancy factor. The life expectancy factor is taken from the IRS Uniform Lifetime Table or the IRS Joint Life Expectancy Table.
For example, your 2025 RMD amount will be:
The balance of your account on December 31, 2024 / Your life expectancy factor
Now that we have a general understanding of required minimum distributions, let’s talk Roth conversions.
With a Roth conversion, you move money out of your traditional IRA, pay the taxes on it upfront, and have a new source of tax-free retirement income.
A common misconception, however, is that a Roth IRA conversion is all or nothing. But, in fact, you can convert smaller amounts over several years.
And when you get the timing and size of those conversions right, you can stay within your current tax bracket while reducing the size of your traditional IRA and future RMDs.
Essentially, you’re making smaller tax payments over time—rather paying than a boatload of taxes later in retirement–and, hopefully, less taxes overall.
The biggest benefit from a partial Roth conversion comes when your current tax rate is lower than your expected tax rate will be when RMDs kick in at age 72.
In those cases, you can calculate the exact amount of IRA assets you can afford to convert each year while staying within your current, relatively low tax bracket.
For many of our clients who choose to retire in their 60s, we find the sweet spot for partial Roth conversions is in the years after retirement and up to age 72.
Consider a couple who retire at age 65 with a $3 million portfolio, $1 million of which is saved in a traditional IRA.
Their joint income has dropped from the $250,000 they were earning before retirement to about $50,000, mostly from the income generated through their taxable investments—dropping them into the 12% tax bracket.
This lower income bracket gives the couple a lot of headroom to convert savings from their traditional IRA without increasing their current tax bracket (the current maximum taxable income for the 12% bracket is $94,300) so they might decide to convert $44,300 ($94,300 - $50,000) each year until age 72 to reduce their IRA balance by $310,100.
By reducing the traditional IRA balance by almost one-third, it reduces the couple’s RMDs by roughly $12,000, and thus lowers the related taxable income they must realize after age 72.
In this particular example, someone may determine they will move beyond the 22% tax bracket and into the 24% tax bracket once they start receiving Social Security benefits.
In this situation, a case can be made for converting a larger portion of your IRA and move into a higher tax bracket today, but still remain at a lower bracket than where you expect to be at the point you are taking RMDs.
If you are not able to take advantage of the years between retirement and age 72 to perform such super-charged Roth conversions, there are other ways to get similar benefits. But what works for you will depend greatly on your own circumstances.
For example, you might stretch a partial conversion out over a longer period—say, from age 60-72. This approach could allow you to convert smaller sums each year, keeping your annual income within your existing tax bracket and still removing a big chunk from your traditional IRA by the time RMDs kick in.
You also might be able to use tax deductions to offset the cost of a given year’s conversion.
A good example of this is using a donor-advised fund to maximize the tax benefit of your charitable donations while also reducing the cost of a partial Roth conversion.
For business owners, accelerating expenses or delaying income into a specific calendar year can also help manage the taxes associated with a partial Roth conversion.
For many people, a partial Roth conversion helps make sure you don’t overpay the government—while reducing the chance of a nasty surprise like a staggering tax bill after age 72.
A partial Roth conversion is just one strategy to help you maximize how you use your money. There are dozens of strategies you can use at any point in your financial journey – before or after retirement.
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