My wife is currently working and has a traditional IRA with approximately $350,000 to $400,000. She is almost 65 but not looking to retire anytime soon. Should she roll over her IRA and take a tax hit and open a Roth IRA? I’m not sure if this is a smart move at this time in her life. Any suggestions will be helpful.
– Ed
That’s a great question, and definitely something worth thinking about. Whether a Roth conversion makes sense really depends on the specifics of your situation. Let’s walk through how to evaluate the key factors so you can make a decision that fits your needs. (And if you’re interested in finding a financial advisor to help you make retirement planning decisions, this free tool can connect you with advisors who serve your area.)
Roth conversions are mostly about tax efficiency. Let’s start with the simple fact that you’ll have to pay taxes on the money you withdraw from tax-deferred accounts. Fortunately, to some degree, you can decide when that happens:
You can leave the money in your tax-deferred account and withdraw it throughout retirement, and pay taxes on it as you go.
You can convert it into a Roth IRA and pay taxes on it, and then take tax-free withdrawals going forward.
It ultimately comes down to deciding which will result in fewer taxes over time. The decision to do a Roth conversion is inherently about comparing current and future tax liabilities.
Suppose a single person is working, and currently at the very top of the 24% bracket. For 2025 that is $197,300 for a single person. Also, assume that they plan to retire next year, and their taxable income will fall to $140,000.
For simplicity’s sake, let’s ignore all other variables for now. In this scenario, they might avoid converting their balance this year and wait until next year instead. Why? Because they’re currently at the top of the 24% bracket and would owe 32% on any additional taxable income. If they wait until next year-when their income drops to $140,000-they could convert part of their IRA at the 24% rate. That’s an 8% tax savings just for waiting a year.
In order to effectively approach this decision, you first need to estimate your projected income in retirement. This may be a combination of Social Security, pensions, annuities, planned withdrawals, and any other taxable income sources. (But if you need help planning for retirement, work with a financial advisor.)
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As you work through this, don’t think of it as an all or nothing decision. If you decide to go forward with a Roth conversion, a series of partial conversions may be the best way to do it. Converting an entire pre-tax balance all in one tax year is rarely optimal.
That $400,000 by itself would put you and your wife near the top of the 24% bracket for married couples filing jointly, assuming the standard deduction. Depending on the rest of your income, you could easily be in the 32% marginal tax bracket.
Instead, approach tax planning with a target rate in mind. If 24% looks optimal based on your income and savings, convert just enough to stay within that bracket.
It can also make sense to wait. Maybe you don’t do a Roth conversion this year because your income is comparatively high. It might make sense to start converting a little each year when your wife retires. (And if you need help timing certain strategic moves, like Roth conversions, consider working with a financial advisor.)
There are a few other factors to consider in addition to tax and income planning when contemplating a Roth conversion.
Your Medicare premium is partially determined by your income. The higher your income, the more you have to pay for Parts B and D. Medicare refers to this as your Income-Related Monthly Adjustment Amount (IRMAA). Doing a large Roth conversion can push you up into the next IRMAA bracket. However, since future withdrawals are tax-free, a conversion could lower your Medicare premiums in the future. Consider IRMAA in your decision.
As things stand now, certain provisions of the Tax Cuts and Jobs Act will sunset at the end of 2025, and tax rates will go up. Consider these potential changes in your analysis.
Roth accounts are not subject to required minimum distributions (RMDs). This can give you much more control over your distribution plan in retirement. If you value that control, Roth conversions can make sense even if they aren’t necessarily more tax-efficient for you.
RMDs can catch you by surprise. You may want to take small withdrawals, but the required amounts later in retirement could be much higher. Consider the tax implications of larger RMDs in later years. (A financial advisor can help you build a withdrawal strategy that accounts for RMDs.)
If you are married, consider the effect on a surviving spouse if one of you passes away. The surviving spouse will be subject to income tax at the “single” rate, as opposed to the joint rate while both of you are still alive. Roth conversions can help reduce the potential tax burden on a widow or widower.
You should certainly evaluate whether Roth conversions make sense for you. On the surface, two things stick out to me about your situation.
Your wife is still working. This is a possible indication that your current income is higher than it will be later when she stops. However, that isn’t necessarily so. Many people have the same or higher taxable income after they retire, especially if they have saved diligently.
If your wife doesn’t plan to retire soon, she probably won’t go on Medicare soon either. Converting now before she enrolls in Medicare can help you avoid IRMAA. Just be mindful that IRMAA is based on a two-year lookback, so her Medicare premiums in 2027 will be based on her income in 2025.
Estimate your current and future tax liabilities. Then, compare the two to decide if a Roth conversion can help you, and when the best time to do one might be.
Brandon Renfro, CFP®, is a SmartAsset financial planning columnist and answers reader questions on personal finance and tax topics. Got a question you’d like answered? Email AskAnAdvisor@smartasset.com and your question may be answered in a future column.
Please note that Brandon is not an employee of SmartAsset and is not a participant in SmartAsset AMP. He has been compensated for this article.Some reader-submitted questions are edited for clarity or brevity.
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