We’re 67 Years Old With $1 Million in IRAs. Is It Too Late to Convert to a Roth?

At age 67, converting $1 million in IRAs to a Roth can be appealing because it offers tax-free income in retirement. The IRS allows Roth conversions at any age or income level, though withdrawals are restricted for five years after opening the account. Converting later in life can still make sense, but it involves tradeoffs related to taxes, healthcare costs, and estate planning that should be carefully reviewed before making the move. Ask a financial advisor if Roth IRA conversion makes sense for you.

Understanding Roth IRA Conversions

A Roth conversion involves moving retirement savings from a traditional IRA account into a Roth IRA account. Traditional IRA contributions provide tax deductions, lowering your taxable income each year you contribute. But traditional IRA withdrawals taken during retirement get taxed as ordinary income based on whatever tax bracket you fall into at that time.

Roth IRAs work in the opposite manner. Contributions are made using after-tax dollars, so you don’t lower your current taxable income with contributions. However, qualified withdrawals later in retirement are completely tax-free. The conversion catch is that when you do one you have to pay any taxes due now on the funds you convert. This is not an insignificant concern.

A 67-year-old couple converting their entire $1 million traditional IRA into a Roth version in a single year would owe income tax immediately on the entire converted balance. This lump of income would also put them into the highest income tax bracket. Tax rates could be as high as 37% federally, plus applicable state taxes of 5% to 13% depending on your location. Naturally, few people are eager to write a six-figure check to the IRS, although there are ways to make this less painful.

Roth IRA Conversion Specifics

Let’s walk through what could happen if a retired 67-year old couple with $1 million in a traditional IRA and average combined annual Social Security benefits of about $49,000 ¹ decides to convert to a Roth IRA. There are two main ways of doing this, including all at once and over time.

If they opted to convert the entire $1 million IRA balance to a Roth IRA in a single tax year, they would incur federal and state income taxes that year on the full $1 million converted amount, placing them in the highest income tax bracket. Total ordinary tax rates could approach 40% to 45%, or $400,000 to $450,000 on a $1 million conversion.

That’s the all-at-once approach. By taking their time and spreading the $1 million conversion over 10 years at $100,000 converted per year, they would only owe income tax each year on $100,000. Assuming for this example that Social Security benefits and income tax brackets stay unchanged, they would be in the 22% federal tax bracket. They would owe $22,000 federal tax on each $100,000 conversion, a much more manageable bill. Plus, total tax over 10 years comes to $220,000 or about half as much as the all-at-once approach.

However, note that this strategy is only worthwhile if they don’t need the money until late in retirement, as they’ll need to let the account age at least five years before making a proper withdrawal. This may be useful if they’re looking to leave a tax-free inheritance.

They would still owe taxes on their Social Security benefits as well in each of those 10 years. But diverting some savings into the Roth IRA provides some future tax-free income capacity that can be drawn on to balance out taxes owed later on traditional 401(k) or IRA withdrawals. Conversion diversification lets them prudently minimize their overall lifetime tax liability. It also creates a pool of tax-free legacy money if they eventually gift a portion of the Roth account to children or grandchildren.

Additional Roth IRA Conversion Considerations

Other factors also may weigh on a sizable Roth IRA conversion decision. For example, realizing the conversion income could impact taxation of Social Security benefits, Medicare premiums and eligibility for certain tax credits like the Premium Tax Credit. Any required minimum distributions (RMDs) already taking place on the existing traditional IRA would need to be accounted for in multi-year projections also.

Estate plans should also be taken into account. For example, if you plan to leave all your wealth to a charity, it likely makes sense to leave funds in the traditional IRA rather than converting to a Roth because the charity won’t owe taxes on the bequest. You’ll also need to ensure beneficiaries on the Roth are named correctly and evaluate the conversion’s impact on any trusts you have set up.

Your retirement income likely won’t come from just one source. Our retirement calculator helps you see how Social Security and personal savings could combine over time.

Making the Roth IRA Conversion Call

If you’re considering a large Roth conversion, there are a few steps to take:

1. Designate beneficiaries: First, clarify what should happen to the IRA assets upon death. If the goal is to leave a tax-free inheritance to your heirs, calculated Roth conversions can guarantee continued tax-free growth.
2. Consider tax rates: Next, assess current marginal and future effective tax rates in retirement. If you expect tax rates to rise substantially, paying taxes now through a conversion could save money later.
3. Run a financial analysis: Finally, analyze existing income streams and multi-year tax scenarios, as well as your healthcare budget and estate plans.

In most cases, you will wind up choosing not to convert all at once. For those with large traditional IRAs, strategic partial conversions tailored to your needs often make the most financial sense.

How to Time Your Withdrawals to Minimize Taxes

The order in which you withdraw funds from different accounts can affect how much tax you pay in retirement. Each account type is taxed in its own way, so planning withdrawals carefully can help reduce total taxes over time.

Many retirees start by using money from taxable accounts first. This allows traditional IRA and 401(k) balances to continue growing tax-free until later. During the early retirement years when income may be lower, some investors choose to convert part of their traditional IRA to a Roth IRA at a smaller tax rate before RMDs begin at age 73.

When RMDs begin, those withdrawals are taxed as ordinary income. At that point, having Roth IRA assets can add flexibility because their withdrawals are not taxed and not subject to RMDs. Combining both account types can help smooth out income and keep you from moving into higher tax brackets.

The timing of Social Security benefits also matters. Delaying benefits until age 70 can provide several years with lower taxable income. That window can be useful for partial Roth conversions. Once benefits start, more of your income may become taxable, leaving less room for conversions.

This type of retirement strategy does not completely eliminate taxes, but it helps manage when they are paid.

Bottom Line

Once you are 67 years old or older, you can still convert all or part of your traditional IRA assets to a Roth IRA. That does not necessarily mean that this is right for you, however. To decide if this aligns with your financial strategy, take the time to assess your multi-year tax picture and compare current and future tax brackets, so you can understand total costs and implications involved. Then, you can pick the right Roth conversion approach that works best for your particular financial situation. However, converting everything in one year is often not as favorable as spreading conversions over time. 

Retirement PlanningTips

• A financial advisor can explain how a Roth IRA conversion would impact tax bills, estate planning, healthcare costs and more. 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.
• Plug your figures into SmartAsset’s Social Security calculator to get a feel for how much your benefits will be after you retire.

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