I’m 60 With $1.2 Million in an IRA. Should I Convert $120,000 Per Year to a Roth to Avoid RMDs?

If you’re 60 years old with $1.2 million in a traditional IRA, you may be starting to think about required minimum distributions (RMDs) and the tax bill they can create after you turn 73. Converting a portion of your IRA to a Roth IRA each year can help you reduce or avoid RMDs while better controlling your tax bill. However, this also comes at a cost.

Discuss Roth IRA conversion strategies with a financial advisor to determine what works best for your broader financial plan.

RMD Rules: The Basics

Once you turn 73, the IRS requires that you start taking annual distributions called required minimum distributions from traditional IRAs, 401(k)s and similar tax-deferred accounts.

You calculate RMDs by dividing your account balance by your life expectancy factor. This is a value that the IRS sets based on your age.

RMD withdrawals are treated as ordinary income. With a large IRA balance, mandatory RMDs can easily push someone into a higher tax bracket and lead to a higher tax bill.

Roth Conversions

Roth IRAs, unlike traditional IRAs and 401(k)s, aren’t subject to RMD rules.

By converting your IRA to a Roth, you can avoid having to pay extra income taxes from mandatory IRA withdrawals in retirement. The catch is that you have to pay income taxes on the amount you convert at your ordinary income rate when you convert it. This can lead to a massive tax bill if you were to convert a $1.2 million IRA to a Roth all at once.

Instead, gradually converting your traditional IRA to a Roth IRA allows you to control when you pay taxes. Rather than unspecified mandatory RMD withdrawals, you choose when to take taxable Roth conversions. Roth withdrawals in retirement are tax-free, provided you wait five years before withdrawing those assets.

Keep in mind that the five-year period applies to each conversion. If you were to convert a portion of your IRA in 2024, 2025 and 2026, you must wait until 2029, 2030 and 2031, respectively, to withdraw each group of funds tax-free.

If you need additional help navigating Roth IRA rules surrounding Roth conversions, consider meeting with a financial advisor.

A Roth Conversion Example

Assuming your investments grow at 5% each year for 13 years, your $1.2 million IRA could be worth around $2.3 million by the time you reach age 73. By that time, your first RMD would be approximately $87,000 based on the IRS life expectancy factor.

Assuming you’re collecting $80,000 annually in taxable income from pensions and Social Security, adding an extra $87,000 would push you from the 22% bracket into the 24% bracket.

With 13 years of $120,000 in Roth conversions already complete, however, the IRA balance subject to RMDs could be reduced to around $42,000 by age 73. Your first RMD would be just under $1,600.

This would not likely push you into a higher tax bracket, saving you thousands in annual taxes during retirement. This is preferable to taking the full $87,000 distribution without any prior Roth conversions.

The key is not to convert your entire IRA to a Roth immediately, but rather to take an incremental approach. By limiting Roth conversions to a certain amount, you can control and potentially reduce your tax liability.

Spreading conversions over time allows taxpayers to meet their current bracket without exceeding it. By staying in lower brackets, more money is shielded from future taxes than paying the IRS immediately at today’s rates.

Roth Conversion Limitations 

No matter how you do it, Roth conversions trigger taxes. Without sufficient non-retirement savings or other sources of income, investors may struggle to pay conversion taxes or have to sell investments at a loss.

Optimal timing and tax planning are also challenging. Tax rates and laws can change frequently, making it hard to predict brackets decades in advance. Income fluctuations from bonuses, dividends and retirement plan withdrawals can also complicate projections.

Converting too little defeats the purpose of avoiding higher future RMD taxes. However, converting too much could push you into higher brackets now or reduce your flexibility if tax rates decline. Balancing present and future tax minimization is tricky with many uncertainties at play over long time horizons.

Additional factors may also come into play:

• Deductions that reduce taxable income
• State taxes
• Fluctuating investment returns
• Income from other sources, such as part-time work

These are all potentially important variables to consider when crafting the optimal Roth conversion strategy.

How Roth Conversions Can Affect Medicare Premiums and Social Security

The impact of a Roth conversion on your tax bracket is the most visible cost, but there are two other disadvantages that can add significantly to the overall cost.

Medicare

What many retirees do not realize is that Medicare premiums are not a flat fee. Instead, higher earners pay more. The government determines how much more based on tax returns filed two years earlier.

A Roth conversion that substantially raises reported income in one year can result in a larger Medicare bill two years down the road. The income limits that trigger these higher premiums start at $153,000 for single filers and $242,000 for married couples in 2026, rising in tiers above those levels. ¹

The two-year lookback is what surprises most people. A conversion at 63 shows up in premium calculations at 65, the year Medicare typically begins. Missing that connection can mean higher costs at the worst possible moment.

Social Security

The second consideration involves Social Security.

Up to 85% of monthly benefits can become taxable when a retiree’s total annual income crosses certain thresholds. ² A Roth conversion adds directly to that income figure, potentially taxing more of your Social Security benefit. If a retiree receiving $40,000 per year from Social Security completes a large conversion, they may find that much of their payments are suddenly subject to federal tax.

Neither consequence shows up in a basic bracket calculation. Factoring both Medicare and Social Security into the annual conversion decision gives a more accurate picture of actual conversion costs.

A financial advisor can help you model it all before you act.

Bottom Line 

Roth IRA conversions allow investors to control when they are taxed. By paying taxes now at known rates through incremental conversions, overall lifetime taxes can be reduced. It is the more cost-effective option compared to unpredictable mandatory RMD withdrawals decades into the future. However, Roth conversions come at a cost today. They require non-retirement funds to pay taxes and involve considerable analysis and some guesswork to optimize.

Retirement Planning Tips

• A financial advisor can help develop Roth IRA conversion strategies. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
• Knowing how much money you’ll need to retire and whether you’re on track to hit that target is vital when you’re planning for your golden years. SmartAsset’s retirement calculator can help you estimate how much you may have in savings when the time comes for you to retire.

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