401(k) Roth IRA It may be attractive for several reasons. Not only can you make qualified withdrawals from your Roth account tax-free, Roth accounts are also tax-free. Required Minimum Distribution (RMD) This gives you more flexibility and potential tax savings when withdrawing money from your account in retirement.
If you’re considering converting to a Roth or need help planning your RMDs, financial advisor.
imagine you are approaching retirement age, and has $1.3 million in a 401(k). Converting your entire balance at once can result in large taxes. On the other hand, if he converts his 401(k) in stages over 10 years, he can reduce his taxes compared to converting it all in one transaction.
You can start converting $130,000 per year, but you can change that amount later, depending primarily on where you invest. 401(k) Execute.
Impact of Roth conversion on RMD
RMD withdrawals that need to be withdrawn tax-deferred retirement account Starts at age 73 (RMD age increases to 75 for those who turn 74 after December 31, 2032). These withdrawals are treated as follows: Ordinary taxable incomeTherefore, RMDs can push you into a higher tax bracket and increase your tax bill.
For example, if you’re 59 years old and have $1.3 million in your 401(k) and earn 4% annually for the next 14 years, your 401(k) could grow to more than $2.77 million.. If you start taking RMDs at age 73, your first RMD will be over $104,000. That amount increases if you’re a single filer and your only other taxable retirement income is your $25,000 Social Security benefit. marginal tax rate 12% to 24% (using 2024 tax brackets).
Avoiding RMD is not the only reason to consider converting. You may also want to consider switching if you think you will be subject to higher taxes in retirement. Additionally, in a Roth account, bequeath your property Therefore, conversion can be a useful estate planning tool. however, loss conversion Depending on your situation and purpose, Contact a financial advisor And talk about it.
conversion strategy
Cashing out $1.3 million all at once puts you in the highest marginal tax bracket (37%) and requires you to pay more than $430,000 on your next tax return. Repeating the conversion of $130,000 per year over the next 10 years could significantly reduce this tax bill.
For purposes of illustration, assuming that you have $60,000 of other taxable income each year after deductions and credits, your annual income during the conversion period is $190,000. If you’re a single filer, you’ll be in her 24% group and have to pay about $35,000 in taxes per year (assuming you pay taxes). standard deduction). Over a 10-year conversion period, he would hypothetically pay more than $350,000 in taxes, but could save about $80,000 compared to doing a one-time conversion.
Other conversion strategies may be used depending on the situation. For example, if you expect your income to decrease in a given year, you may want to convert a larger amount. The central idea is to cash out enough of your 401(k) savings to bring your taxable income up to the next tax bracket’s threshold, but not more. Interested in Roth conversions and other tax planning strategies? financial advisor.
Notes on Roth conversions
Although it makes economic sense to convert 401(k) funds to a Roth account, there are some risks and limitations to this move. first, have to wait 5 years After you establish your Roth IRA, you withdraw your investment income from your account. Violating this rule could result in income tax charges and possibly a 10% early withdrawal penalty.
There’s also a separate five-year waiting period that specifically applies to Roth conversions. The IRS requires you to wait five years from the beginning of the year you completed the conversion before withdrawing the converted money. However, this particular five-year rule does not apply to people over age 59 and a half.
If you establish a Roth now at age 59 and begin taking withdrawals before age 64, you may have to pay taxes on a portion of your withdrawals.
Implementing a Roth conversion strategy also requires making projections about future tax rates and returns on your investments. Predictions involve risk because events may turn out differently. For example, if you expect future tax rates to go down, but then they go up: current law If that’s what you’re looking for, it might be better to achieve more conversions than you do now.
If your investment yields a higher return than expected, you may wish you had converted more. Therefore, when you complete your conversion plan, your 401(k) balance may be higher than expected and you may still have to take RMDs.
Finally, if you have money left in your 401(k), don’t forget to take your required RMDs. If you do so, you may incur a penalty of 25% of the amount you should withdraw as an RMD. And remember, financial advisor Helps you plan for RMDs and their tax implications.
conclusion
Converting funds from a 401(k) or other tax-deferred retirement account can help you avoid RMDs and potentially reduce your tax bill. It may make sense to gradually convert a portion of your 401(k) each year as a way to reduce your current taxes. However, if the tax rate or investment income turns out to be different than planned, you may need to be flexible with the conversion amount.
RMD planning tips
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If you have a tax-deferred retirement account, you need to know how much your RMDs are likely to be and plan for the tax implications. Calculating RMD It’s relatively easy to do it yourself, but SmartAsset RMD calculator To make it even easier. This free tool can help you estimate how much your first RMD will be and when you need to take it.
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Deciding how to move funds from your 401(k) to a Roth account requires careful evaluation of your options. A financial advisor can help you with that. Finding a financial advisor doesn’t have to be difficult. SmartAsset Free Tools , we match you with up to three vetted financial advisors serving your area. You can also have a free introductory call with an advisor to determine which advisor is right for you. Are you ready to find an advisor to help you reach your financial goals? Get started now.
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post I’m 59 years old and have $1.3 million in my 401(k). Should I convert $130,000 per year to a Roth to avoid RMDs? It first appeared SmartRead with SmartAsset.
