I’m 62 With $900,000 in My 401(k). Should I Convert $90k per Year to Avoid Taxes and RMDs in Retirement?

Late-in-life Roth conversions can take some tricky math. As you approach retirement, one of the most important questions will be how to manage the taxes on your retirement income. For households that rely on pre-tax portfolios, like a 401(k) or a traditional IRA, this means anticipating ordinary income taxes on all of your withdrawals. It also means anticipating the necessary withdrawals associated with the IRS’ Required Minimum Distributions (RMD) rule.

As a result, it’s common for people in their 60s to at least consider converting their money to a Roth IRA. This can have significant upsides. It will eliminate your taxes in retirement, along with your RMD requirements. Further, it will even improve the after-tax value of your estate.

The problem is that, as you close in on retirement, a Roth conversion can get very expensive. You will pay quite a lot of up-front conversion taxes in exchange for those long-term income tax savings. Let’s say you’re 62 with $900,000 in your 401(k). In this case, will you save money by converting your portfolio to a Roth IRA $90,000 per year? Here are some things to think about. 

A financial advisor can provide personalized guidance for Roth conversion and other retirement strategies.

RMD and Pre-Tax Portfolio Taxes

Every pre-tax retirement portfolio, including 401(k)s and traditional IRAs, have two major issues that households should keep an eye on. 

First, these portfolios are taxed as ordinary income when you take withdrawals in retirement. This means you pay taxes at income tax rates, instead of at the lower rate ordinarily reserved for investments and capital gains. These taxes apply to your entire withdrawal, not just the portfolio’s gains, as your original contributions were tax-deferred. 

Second, all pre-tax portfolios have what are called Required Minimum Distributions (RMDs). This is a minimum amount that you must withdraw from each pre-tax retirement account you hold. Currently, RMDs begin at age 73, meaning you must begin taking them in the year you turn 73. The exact amount you must withdraw is based on a combination of your portfolio’s value and your age.

Make sure you’re taking the right amount by starting your own RMD calculation:

Required minimum distributions are a form of tax planning by the government. This is an IRS rule intended to make sure you begin triggering tax events on your pre-tax portfolios, so the government can collect planned revenues. The penalty for not taking your full RMD is assessed on your taxes. 

Because these withdrawals are fully taxable, RMDs can significantly affect your overall tax situation in retirement. Large distributions may push you into a higher income tax bracket, increase the portion of your Social Security benefits that are taxable or even trigger Medicare premium surcharges (known as IRMAA).

For many retirees, this means that tax management isn’t just about following the rules. Instead, it’s about strategically timing withdrawals and balancing income sources to avoid unnecessary tax consequences.

Roth Conversions and Retirement Taxes

The easiest way to avoid both taxes and RMDs is through a Roth IRA. 

Post-tax portfolios like Roth IRAs do not have required minimum distributions. This is because you do not pay any taxes on the money you withdraw from these accounts.

To take advantage of this, many households consider what is called a Roth conversion. This is when you transfer money from a qualifying pre-tax portfolio, such as a 401(k) or an IRA, to a post-tax Roth IRA. You can convert any amount of money you want, so long as it comes from a valid pre-tax account. Once the money has been moved to a Roth IRA, it will grow tax-free, and you will have neither income tax nor RMD requirements in the future.

How Roth Conversions Impact Retirement Taxes

The catch to a Roth conversion is that you do have to pay upfront conversion taxes. When you convert money to a Roth portfolio, you include the entire amount converted as taxable income for the year in question. This increases your taxes for the year proportionally.

For example, let’s say you’re an individual making $75,000 per year. Ordinarily, you would owe around $13,686 in annual federal income taxes. However, say that this year you convert your $900,000 401(k) to a Roth IRA. This would bring your taxable income to $975,000 for the year, and you would owe total federal income taxes of $343,973.

If you are older than 59 ½, you can withdraw money from your portfolio to pay these taxes. Here, for example, your Roth conversion could raise your taxes by an estimated $330,287 for the year. If you take that from your portfolio, you would have $569,713 left in your Roth IRA after taxes. If you are not older than 59 ½, or if you’d like to leave your money in place, you will need to have another source of funds to pay these taxes.

Staggered Roth Conversions

As we illustrate above, conversion taxes can be a huge drawback to a Roth conversion. The closer you are to retirement, often the more likely it is that the costs of conversion taxes will outweigh your future tax savings. This is because you are likely to be in a higher tax bracket late in your career, you will transfer more money if you are nearing retirement and your Roth IRA will have less time for tax-free growth. 

One way to help manage these impacts is through what’s called a staggered conversion. This is when you convert smaller amounts of money in stages, rather than a large amount of money all at once. 

The key advantage to a staggered conversion is that it can help keep your tax brackets low. The more money you convert, the higher your taxable income and the higher your resulting tax brackets. This means you will pay higher taxes per dollar converted than you would by converting less at a time. By converting your money in smaller, staggered amounts, you can keep your tax brackets lower. 

Take our example here: If you convert all $900,000 at once you will push your taxable income to the 37% bracket, with an effective tax rate of 32.02% overall (setting aside your ordinary income for the year). On the other hand, if you convert just $90,000, that would only fall into the 22% tax bracket, and a 13.40% effective rate. 

Again, setting aside your income, each $90,000 conversion would trigger $18,134 of federal income taxes. This would come to $181,340 over 10 years, less than half the $343,973 in conversion taxes you would pay by making this move all at once.

Should You Make a Roth Conversion?

So, should you convert your money? It depends on your goals. If you are approaching retirement, you might spend more money on conversion taxes than you will save on income taxes and RMD requirements. If you are looking to maximize the value of your estate, however, you will usually preserve the most wealth for your heirs by allowing them to inherit a tax-free Roth IRA.

A Hypothetical Example

To understand that, let’s look at your $900,000 401(k). For ease of use, we will assume away both inflation and portfolio growth, although in real life neither are trivial concerns.

Let’s assume your income is the rough median of $75,000 per year. If you convert $90,000 per year, this would push your annual taxable income to $165,000. Your tax bracket would tick slightly up from 22% to 24%. You would pay conversion taxes of approximately $27,603 per year ($41,289 total taxes – $13,686 of income taxes at $75,000 of income). 

Over 10 years, this would come to a total of $276,030 in conversion taxes, leaving you with $623,970 in a Roth IRA at age 72.

Let’s further assume you use a standard 4% withdrawal strategy, meaning you take 4% from this portfolio each year for 25 years. With our post-conversion Roth IRA this would give you approximately $24,959 of after-tax income each year ($623,970 * 0.04). With your traditional IRA, you would have an estimated $33,652 of after-tax income each year ($900,000 * 0.04 = $36,000 – $2,438 of taxes). 

So, in this case, you might have more income by leaving your money in place, and that’s before we even account for lost growth and opportunity cost due to the conversion taxes.

A Real World Breakdown

However, these examples are simplified. They don’t account for some dynamics, like portfolio growth, inflation and your own income level and retirement needs.

Still, though there are many ways to look at it, in most cases, the result is the same. By the time you reach your 60s, your retirement accounts have grown large enough to trigger very significant conversion taxes. At the same time, a new Roth portfolio will have little (if any) time to enjoy untaxed growth that would offset those taxes.

That said, while it’s often not the case, for the right individuals a late Roth IRA conversion can be a real boon.

How Roth Conversions Affect Medicare Premiums and Social Security Taxes

Most people evaluating a Roth conversion focus on the conversion tax itself. Two other costs deserve equal attention: what a conversion does to your Medicare premiums and how it interacts with the tax treatment of your Social Security income.

Medicare Premiums

Medicare does not charge everyone the same premium. Higher earners pay more, and the income figure used to make that determination comes from your tax return two years earlier. A large conversion in one year can quietly raise your premiums two years later, even if your income has since returned to normal.

The surcharge kicks in above certain income thresholds, and then it scales upward from there. At the highest levels, the monthly premium for Part B alone can be several times the standard rate. Part D follows a similar structure.

For retirees planning annual conversions, staying below these thresholds is often as important as staying in a lower tax bracket.

Social Security

How much of your Social Security benefit gets taxed is not fixed. It depends on a broader income measure that takes your other income into account. As that figure rises, a larger share of your benefit gets pulled into taxable income, up to a maximum of 85 cents per dollar received.

A Roth conversion adds to this calculation. For retirees already collecting Social Security, even a modest conversion can increase the taxable portion of their benefit in ways that a basic tax estimate will not reflect. The combined effect of conversion taxes, Medicare surcharges and additional Social Security taxation can be substantially higher than the conversion tax alone suggests.

Modeling all three together before deciding how much to convert in a given year is worth the effort. The difference between converting $80,000 and $100,000 may look small on a tax bracket chart. But once all three factors are accounted for, it can land very differently.

How to Decide if a Roth Conversion Makes Sense for You

Before converting your 401(k) or IRA to a Roth account, it’s worth stepping back to evaluate whether this strategy fits into your overall financial picture. A Roth conversion can reduce future tax burdens and eliminate RMDs. However, it’s vital that the timing and long-term math works in your favor.

Here are key factors to consider when making the decision:

• Your current and future tax brackets. If you expect your income tax rate to fall in retirement, a Roth conversion could increase your total lifetime taxes rather than reduce them. Conversely, if you anticipate higher tax rates later—either due to personal income growth, legislative changes or RMDs pushing you into a higher bracket—a conversion might make sense now while rates are lower.

• Your retirement timeline. How close you are to retirement plays a big role. Conversions made earlier, such as in your 50s or early 60s, give the Roth IRA more years to grow tax-free. If you’re already retired or plan to withdraw soon, the shorter time horizon may not justify the up-front tax hit.

• Available funds to pay conversion taxes. Ideally, conversion taxes should be paid with cash from outside your retirement account. Using portfolio funds to pay the bill can shrink your principal and reduce the benefits of compounding. If you don’t have non-retirement assets available for taxes, you may want to convert smaller amounts or reconsider altogether.

• Estate planning goals. Roth IRAs can be powerful tools for leaving wealth to heirs. Beneficiaries can withdraw funds tax-free (subject to the 10-year distribution rule), which can significantly increase the after-tax value of your estate. If building a legacy is a high priority, that advantage may outweigh short-term conversion costs.

• Impact of RMDs on your taxable income. RMDs can inflate your taxable income in retirement and affect everything from your tax bracket to your Medicare premiums. Modeling your future RMDs can reveal whether they’re likely to create tax complications later, and whether gradual Roth conversions could smooth your income and tax obligations over time.

When you take these factors together, the “right” decision depends less on the size of your nest egg. Instead, it matters more what your personal circumstances and income goals are, and how long your money will stay invested.

Roth Conversion Alternatives Worth Considering

A Roth conversion addresses the pre-tax portfolio problem in one way. The following alternatives take different approaches that may work better depending on your situation.

Giving Directly From Your IRA

Retirees who are 70½ or older and donate to charity have an option that a Roth conversion cannot match on tax efficiency. By moving money from an IRA directly to a nonprofit, it is possible to sidestep taxable income entirely. The gift satisfies part or all of the year’s required distribution without the amount ever appearing on your tax return. For anyone who gives regularly, this can reduce the taxable income problem at no additional cost.

Gradual Pre-Tax Drawdowns

The years between leaving work and the age when RMDs begin represent a window that many retirees underuse. Drawing from pre-tax accounts at a measured pace during this period shrinks the balance that will eventually be subject to mandatory withdrawals. The result is smaller RMDs later and a lower tax burden over retirement, without the upfront expense of a conversion.

Offsetting Gains With Losses

Retirees who hold investments outside of retirement accounts can use positions that have declined in value to offset gains elsewhere. This reduces taxable income and can create room in a given year for additional income, whether from a modest conversion or ordinary withdrawals, without pushing into a higher bracket.

Drawing Strategically Across Account Types

A portfolio that includes pre-tax, Roth and taxable accounts does not need to be converted to a single type. Each year, withdrawals can be drawn from whichever account produces the most favorable tax outcome given that year’s income.

For instance, in a lean income year, pre-tax withdrawals may land in a low bracket. In a heavier income year, Roth withdrawals carry no tax at all. Maintaining all three gives you options that a fully converted portfolio does not.

Waiting on Social Security

Holding off on Social Security past full retirement age raises the eventual monthly benefit and reduces how much you need to pull from taxable accounts in the meantime. For some retirees, that combination creates a window for smaller pre-tax withdrawals at lower rates before Social Security income begins pushing the overall picture into higher territory.

None of these approaches works the same way for every household. The right combination depends on your account balances, income sources, spending needs and level of flexibility you have in the years ahead.

Bottom Line

A Roth IRA can certainly help you manage your taxes and RMD withdrawals in retirement by eliminating them altogether. However, as you approach retirement, make sure that your long-term savings will actually exceed your up-front conversion taxes. Otherwise, you might pay a hefty premium for that ease of mind. A financial advisor can model different conversion timelines and help you determine whether the benefits outweigh the tax cost in your specific case.

More Tips

• A financial advisor can help you build a comprehensive retirement plan. Finding a financial advisor doesn’t have to be hard, either. SmartAsset’s free tool matches you with vetted financial advisors who serve your area. From there, you can have a free introductory call with your matches to decide who is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
• Roth IRAs are a fantastic financial vehicle, but they’re particularly useful if you time them well. Perhaps more than any other retirement account, Roth IRAs are typically most most valuable early in life, when you can maximize the tax advantages. 
• Keep an emergency fund on hand in case you run into unexpected expenses. An emergency fund should be liquid, meaning you can quickly convert the money to cash. The tradeoff 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 leads. It also offers marketing automation solutions, so you can spend more time making conversions. Learn more about SmartAsset AMP.

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