You can make a Roth conversion at any age, and the money that you convert will be exempt from required minimum distribution (RMD) rules. If your only goal is to avoid required minimum distributions – for example, if you want to maximize the long-term value of your estate – this could potentially be a sound option.
However, the older you are, and the closer to retirement, the more likely it is that a Roth conversion will cost you more than you will save on income taxes. For example, say that you are 65 years old. You’ve begun collecting $2,200 per month in Social Security, and would like to make plans now to avoid RMDs on your pre-tax accounts in your 70s and beyond. Can you make a Roth conversion to prevent these required minimum distributions?
The answer is, yes. You can convert your pre-tax portfolios to a Roth IRA at 65, and if your main goal is to avoid RMDs, then you will achieve that. But if you want to save money on taxes or otherwise have more control over your money, a Roth conversion may involve more cost and trouble than might be worth. It all depends on your specific circumstances.
If you have questions regarding the specifics of a Roth conversion for your financial situation, consider reaching out to a financial advisor.
What Are Required Minimum Distributions?
Required minimum distributions (RMDs) are a minimum withdrawal that you must take from qualifying pre-tax retirement accounts each year. They begin at age 73 and continue every year until the account is empty.
The exact amount that you must take in RMDs depends on your age and the total amount in your retirement portfolio at the end of the previous year. For example, say that you are 75 and had $250,000 in an IRA on December 31, 2024. By the end of 2025, you would have had to withdraw at least $10,162 from this account.
This is a lump-sum requirement, meaning that you can withdraw it at any time and in any amounts, so long as you have withdrawn the total amount by the end of the year. It also applies independently to each retirement account you own. For example, say you have a 401(k) and an IRA. Each will have its own required minimum distribution.
The purpose of an RMD is to trigger a tax event. When you take the required minimum distributions, you will owe taxes on those withdrawals. As a result, Roth accounts do not have any RMD requirements. Individuals looking to avoid minimum distributions can, therefore, avoid this issue entirely by converting their portfolios to a Roth account.
The Mechanics of Conversions and RMDs
It’s important to understand the relationship between Roth conversions and RMDs.
What Is a Roth Conversion?
A Roth conversion is when you move money from a pre-tax retirement portfolio, like a 401(k) or a traditional IRA, and place it in a post-tax Roth IRA. From that point on, your money will grow untaxed. When you withdraw it later in life, you’ll pay no taxes on the converted funds (on qualified distributions), nor will they contribute to your taxable income for other purposes, like Social Security taxes and Medicare premiums.
With a Roth conversion, you can only move assets from a qualified pre-tax portfolio. You cannot deposit cash from income or savings (this would qualify as a contribution, not a conversion, and there may be applicable income limits), nor can you move assets from a fully taxed portfolio. However, you can convert qualifying assets in any amount, as often as you like.
When you make a Roth conversion, you must include the entire amount converted in your taxable income for that year. For example, say you convert $100,000 from a 401(k) to a Roth IRA. You would need to declare that additional $100,000 as income and pay taxes accordingly.
If you are over 59 1/2, you can take money from your retirement account to pay these taxes. If you are under this cutoff, you must use other cash on hand.
You can make a Roth conversion at any time, regardless of age, so long as you have funds in a qualifying pre-tax account and can pay the required conversion taxes. If you are under the age of 59 1/2, you cannot withdraw converted assets for at least five years. This is known as the 5-year rule. After age 59 1/2, you can typically withdraw converted assets freely regardless of how long it’s been since your conversion, although this can sometimes change depending on when you began making contributions to your Roth account.
It can be beneficial to plan ahead for your RMDs. This is often something a financial advisor can help with.
Roth Conversions and Social Security
Our hypothetical example in this case raises a few issues. Specifically, what’s the relationship between Social Security, required minimum distributions and a Roth IRA?
Here are a few things to keep in mind:
1. Social Security Does Not Trigger RMDs
First, you do not need to protect Social Security from required minimum distributions.
Social Security benefits are taxable at the time of payment, and this system has its own set of tax rules. Depending on your overall level of income, you might pay taxes on up to 85% of your total benefits. You can file to have these taxes withheld at time of payment, otherwise you must pay those taxes when you file each year.
Since you pay income taxes on benefits, even if you build up savings or investments based on your Social Security earnings, that money will not be subject to RMD requirements.
2. You Cannot Invest Social Security Into a Roth IRA
You can neither convert nor contribute Social Security benefits to a Roth IRA.
Money that you place in a Roth IRA must be what’s called “earned income.” While this is a relatively broad term, in general it means money that you have received as payment for work. So, for example, any payment that you received for a job, self-employment or a business that you run all qualify as earned income. Profits from an investment and Social Security benefits do not.
As a result, you cannot contribute Social Security benefits to a Roth IRA. Nor can you take assets purchased with Social Security benefits and convert them into a Roth IRA (since you cannot use this money to contribute to a pre-tax portfolio, either).
3. Social Security Can Impact Taxes and Contributions
There are two ways that Social Security can impact Roth IRA planning.
First, a portion of your Social Security benefits can be considered taxable income for the year. Here, you will receive $26,400 per year in benefits. This means that, depending on your total income, you might include up to $22,440 in benefits to your taxable income (0.85 * $26,400). This might raise your tax bracket, which would raise your conversion taxes proportionally.
Second, if you work while in retirement, you can generate earned income. This is money you can contribute to a Roth IRA, or which you can contribute to a pre-tax account and then convert to a Roth IRA.
Roth Conversions Near Retirement
Except for tax levels, your Social Security benefits will not impact a decision regarding managing RMDs by converting to a Roth account. Instead, this is an issue largely determined by your tax rates and the value of your pre-tax portfolios.
When you turn 73, the IRS will begin requiring you to take minimum distributions based on each portfolio’s total value. For example, say that you have a 401(k) with $1 million in it when you are 73. You might be required to withdraw up to $37,735 from this account, all of which will be added to your taxable income for the year.
You can prevent this by converting your pre-tax portfolios to a Roth IRA. Since there are no conversion restrictions based on age or retirement status, you are free to do so. So, for example, say that you have that $1 million 401(k) portfolio right now. You might take two strategies:
- Up-Front Conversion: You convert all $1 million right now
- Staggered Conversions: You convert approximately $143,000 per year for the next seven years
In both cases, your entire portfolio will be held in a Roth IRA by the time you turn 73, and none of those assets will have required minimum distributions.
However, you will owe income taxes on the money you convert. If you make an up-front conversion, you’ll add $1 million to this year’s taxable income, triggering an estimated $325,208 in income taxes. If you make staggered conversions, you’ll add $143,000 to each year’s taxable income. That will generate around $170,772 in additional taxes ($24,396 * 7), not adjusted for inflation or potential growth.
This is where the problem comes in. If you’re near or in retirement, your portfolios are likely at or near their peak value. This means you’ll pay the highest possible taxes on your conversion, and your portfolio may have few years to take advantage of the tax-free growth that offsets those up-front payments, depending on your withdrawal strategy.
Consider using this free tool to match with a fiduciary financial advisor if you’re interested in building a strategy for your RMDs and retirement income.
Bottom Line
You can convert your assets to a Roth IRA at any time in life, so long as you have qualifying assets in a pre-tax retirement account. However, if you are in or near retirement, there’s a good chance this won’t save you any money.
Tips On Saving Money In Retirement
- Managing your RMDs in retirement is a really, really good idea, but many retirees don’t think about planning for that. So let’s dive in on how you can keep these required minimum distributions from eating up your portfolios.
- A financial advisor can help you build a comprehensive retirement plan. 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.
- Keep an emergency fund on hand in case you run into unexpected expenses. An emergency fund should be liquid — in an account that isn’t at risk of significant fluctuation like the stock market. 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 and offers marketing automation solutions so you can spend more time making conversions. Learn more about SmartAsset AMP.
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