38:["$","$L39",null,{"category":"$3a","relatedArticles":[{"id":"cG9zdDoyNzkxODA=","databaseId":279180,"postId":279180,"author":{"node":{"id":"dXNlcjoz","databaseId":3,"userId":3,"avatar":{"url":"https://secure.gravatar.com/avatar/3b02fac7ed4b968df109a1571de56eef337973ae16dead35422edea7ab805eb9?s=96&d=mm&r=g","size":96,"__typename":"Avatar"},"description":"SmartAsset employs a team of writers and editors with years of experience in the editorial, news and personal finance industries. Some staff members also hold the Certified Educator in Personal Finance (CEPF®) designation from the Institute for Financial Literacy.","additionalMeta":{"expertise":null,"__typename":"User_Additionalmeta"},"email":null,"firstName":"Michael","fullName":"SmartAsset Team","lastName":"Carvin","name":"SmartAsset Team","postCount":{"pageInfo":{"offsetPagination":{"total":1673,"__typename":"OffsetPaginationPageInfo"},"__typename":"UserToPostConnectionPageInfo"},"__typename":"UserToPostConnection"},"slug":"mcarvin","__typename":"User"},"__typename":"NodeWithAuthorToUserConnectionEdge"},"categories":{"nodes":[{"id":"dGVybToxOTQ3Nw==","children":{"nodes":[],"__typename":"CategoryToCategoryConnection"},"databaseId":19477,"categoryId":19477,"link":"https://smartasset.com/pensions-and-other-retirement-accounts/articles","name":"Pensions & Other Retirement Accounts","postCount":{"pageInfo":{"offsetPagination":{"total":95,"__typename":"OffsetPaginationPageInfo"},"__typename":"CategoryToPostConnectionPageInfo"},"__typename":"CategoryToPostConnection"},"slug":"pensions-and-other-retirement-accounts","ancestors":{"nodes":[{"name":"Retirement","slug":"retirement","__typename":"Category"}],"__typename":"CategoryToAncestorsCategoryConnection"},"parent":{"node":{"name":"Retirement","id":"dGVybTo5Mw==","slug":"retirement","__typename":"Category"},"__typename":"CategoryToParentCategoryConnectionEdge"},"__typename":"Category"}],"__typename":"PostToCategoryConnection"},"content":"$3b","date":"2025-03-21T16:43:41","excerpt":"

A rabbi trust is a type of irrevocable trust that employers use to fund deferred compensation plans for key employees or executives. The money is set aside for the employee but can still be taken by creditors if the employer goes bankrupt. A financial advisor can help you decide if a rabbi trust is a […]

\n","featuredImage":{"id":"cG9zdDoyODIyOTg=","databaseId":282298,"altText":"An employee researches the pros and cons of a rabbi trust.","date":"2025-03-21T16:38:33","fileSize":190373,"mimeType":"image/jpeg","modified":"2025-03-21T16:39:39","sourceUrl":"https://smartasset.com/wp-content/uploads/sites/2/2025/03/iStock-2185949341.jpg","__typename":"MediaItem"},"modified":{"datetime":"2025-3-21","readable":"March 21, 2025","readableExtended":"March 21, 2025, 4:43pm ET"},"multipleBylinesByRole":{"editedBy":{"id":"dXNlcjoyMDU=","databaseId":205,"userId":205,"avatar":{"url":"https://secure.gravatar.com/avatar/01f240c2b0d90b313b0da2f508a21de3166341880494b3d2552dfa7e8fb9565d?s=96&d=mm&r=g","size":96,"__typename":"Avatar"},"description":"Mo Mozuch is a writer and editor based in New York City. He has worked throughout the editorial industry, including as Senior Editor for Newsweek and Executive Editor for International Business Times. More recently, he has also transitioned to the publishing industry, where he currently works as a non-fiction Editor for Sourcebooks. Mo also received his Master’s in Journalism & Multimedia Arts from Duquesne University.","additionalMeta":{"expertise":null,"__typename":"User_Additionalmeta"},"email":null,"firstName":"Mo","fullName":"Mo Mozuch","lastName":"Mozuch","name":"Mo Mozuch","postCount":{"pageInfo":{"offsetPagination":{"total":5,"__typename":"OffsetPaginationPageInfo"},"__typename":"UserToPostConnectionPageInfo"},"__typename":"UserToPostConnection"},"slug":"mmozuch","__typename":"User"},"reviewedBy":{"id":"dXNlcjoxNDQ=","databaseId":144,"userId":144,"avatar":{"url":"https://secure.gravatar.com/avatar/f9d67283a5124e59bce3aa419d39f0450d8c3c316c9596a42a37aa8df9e54482?s=96&d=mm&r=g","size":96,"__typename":"Avatar"},"description":"Brandon is a Certified Financial Planner™ (CFP®), Retirement Income Certified Professional (RICP) and Enrolled Agent (EA) with more than 10 years of experience as a financial professional. He runs his own independent financial planning firm called Belonging Wealth Management, where he helps clients plan out their retirement distributions, minimize taxes, build financial plans and more. He also holds a PhD in Finance from Hampton University, and spent years as an Assistant Professor of Finance at both Louisiana College and East Texas Baptist University.\r\n\r\nBrandon's areas of expertise include financial planning, retirement planning, taxes, Social Security, investing, annuities, general personal finance and more. 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","

What Is a Rabbi Trust, and How Does It Work?

","

Rabbi trusts got their name from a 1980 private letter ruling issued by the IRS, which involved a trust set up by a synagogue for a rabbi’s deferred compensation. The ruling established that assets in the trust would not be immediately taxable to the rabbi, as long as they remained subject to creditors’ claims. Since then, rabbi trusts have been widely used in corporate deferred compensation arrangements.

","

Unlike qualified retirement plans, rabbi trusts are not protected under ERISA, meaning they do not provide the same level of security as traditional retirement accounts like 401(k)s. Instead, these trusts serve as a middle ground — they offer employees some assurance that compensation will be set aside while still remaining part of the employer’s assets.

","

Rabbi trusts are commonly used for executive compensation, severance packages and non-qualified retirement plans, offering a way for companies to set aside funds without triggering immediate tax consequences for employees.

","

How a Rabbi Trust Works

","$52","

Benefits of a Rabbi Trust

","

Tax deferral. Employees do not pay income tax on contributions until they receive distributions. This allows for tax-deferred growth, enabling assets to accumulate wealth over time.
Employee retention. Rabbi trusts help retain key employees by offering long-term compensation incentives.
Security. The irrevocable nature of most rabbi trusts protects employee interests by preventing the employer from withdrawing funds or altering the terms once contributions are made.
Flexible payment. Compensation structures based on specific conditions, such as retirement age, years of service or performance milestones, are available.

","

Potential Drawbacks

","

Despite their advantages, rabbi trusts also come with certain risks and limitations. One major drawback is the lack of protection from creditors. If the employer faces financial difficulties, trust assets may be used to satisfy creditor claims.

","

Another concern is employer control over funding. The employer determines how much and when contributions are made, meaning there are no guaranteed ongoing deposits into the trust. This lack of funding security can create uncertainty for employees relying on deferred compensation. When employees eventually receive distributions, they are taxed as ordinary income rather than benefiting from the lower capital gains tax rates, potentially leading to a higher tax burden.

","

Other Uses

","

While rabbi trusts are primarily used for deferred compensation plans, they also serve other financial and estate planning purposes, such as:

","

Severance agreements. Employers can use rabbi trusts to pre-fund severance payments, ensuring employees receive payouts even if the company undergoes restructuring.
Golden parachutes. Companies sometimes use rabbi trusts to secure executive severance benefits in the event of a merger, acquisition or leadership change.
Estate planning for high-net-worth individuals. Some individuals use rabbi trust structures to defer compensation as part of a larger tax and estate planning strategy.

","

Bottom Line

","

","

A rabbi trust is a non-qualified, irrevocable trust that allows employers to set aside funds for deferred compensation plans while keeping assets accessible to creditors. These trusts provide tax deferral benefits for employees and structured payment plans that encourage long-term retention. However, they also come with risks, particularly in cases of employer bankruptcy, since funds are not protected under ERISA. For executives, employees or employers considering a rabbi trust, consulting with a financial advisor or tax consultant can help determine whether this structure aligns with your long-term financial goals and compensation strategy.

","

Retirement Planning Tips

","$53","

Photo credit: ©iStock.com/damircudic, ©iStock.com/damircudic, ©iStock.com/punyupa

"],"experts":null,"link":"/retirement/rabbi-trust","modifiedIso":"2025-03-21T16:43:42.000Z","published":{"datetime":"2025-3-21","readable":"March 21, 2025","readableExtended":"March 21, 2025, 4:43pm ET"},"publishedIso":"2025-03-21T16:43:41.000Z","shareInfo":{"title":"Guide to Rabbi Trusts: What They Are, Pros and Cons","origin":"/retirement/rabbi-trust"},"isNewsArticle":true},{"id":"cG9zdDoyODA2NjA=","databaseId":280660,"postId":280660,"author":{"node":{"id":"dXNlcjo5NA==","databaseId":94,"userId":94,"avatar":{"url":"https://secure.gravatar.com/avatar/7c731dd1727acb7246e8305663a0f7b141e21e77a35763773a94c0b236d369f5?s=96&d=mm&r=g","size":96,"__typename":"Avatar"},"description":"Eric Reed is a freelance journalist who specializes in economics, policy and global issues, with substantial coverage of finance and personal finance. He has contributed to outlets including The Street, CNBC, Glassdoor and Consumer Reports. Eric’s work focuses on the human impact of abstract issues, emphasizing analytical journalism that helps readers more fully understand their world and their money. He has reported from more than a dozen countries, with datelines that include Sao Paolo, Brazil; Phnom Penh, Cambodia; and Athens, Greece. A former attorney, before becoming a journalist Eric worked in securities litigation and white collar criminal defense with a pro bono specialty in human trafficking issues. He graduated from the University of Michigan Law School and can be found any given Saturday in the fall cheering on his Wolverines.","additionalMeta":{"expertise":null,"__typename":"User_Additionalmeta"},"email":null,"firstName":"Eric","fullName":"Eric Reed","lastName":"Reed","name":"Eric Reed","postCount":{"pageInfo":{"offsetPagination":{"total":959,"__typename":"OffsetPaginationPageInfo"},"__typename":"UserToPostConnectionPageInfo"},"__typename":"UserToPostConnection"},"slug":"ereed","__typename":"User"},"__typename":"NodeWithAuthorToUserConnectionEdge"},"categories":{"nodes":[{"id":"dGVybToxOTQ3Ng==","children":{"nodes":[],"__typename":"CategoryToCategoryConnection"},"databaseId":19476,"categoryId":19476,"link":"https://smartasset.com/roth-and-traditional-iras/articles","name":"Roth & Traditional IRAs","postCount":{"pageInfo":{"offsetPagination":{"total":153,"__typename":"OffsetPaginationPageInfo"},"__typename":"CategoryToPostConnectionPageInfo"},"__typename":"CategoryToPostConnection"},"slug":"roth-and-traditional-iras","ancestors":{"nodes":[{"name":"Retirement","slug":"retirement","__typename":"Category"}],"__typename":"CategoryToAncestorsCategoryConnection"},"parent":{"node":{"name":"Retirement","id":"dGVybTo5Mw==","slug":"retirement","__typename":"Category"},"__typename":"CategoryToParentCategoryConnectionEdge"},"__typename":"Category"}],"__typename":"PostToCategoryConnection"},"content":"$54","date":"2025-04-17T23:37:08","excerpt":"

At age 50, Roth contributions might be valuable, for the right household. With a Roth portfolio, the question is balancing the opportunity costs against long-term savings. Here’s the general rule of thumb: For most households, if you get started in your 20s and 30s, a Roth’s untaxed growth will typically generate benefits that outweigh the […]

\n","featuredImage":{"id":"cG9zdDoyODQ4Mjk=","databaseId":284829,"altText":"A retired couple determining whether they should pivot to Roth contributions.","date":"2025-04-10T23:44:47","fileSize":216832,"mimeType":"image/jpeg","modified":"2025-04-10T23:45:24","sourceUrl":"https://smartasset.com/wp-content/uploads/sites/2/2025/03/iStock-1462311786.jpg","__typename":"MediaItem"},"modified":{"datetime":"2025-4-17","readable":"April 17, 2025","readableExtended":"April 17, 2025, 11:37pm ET"},"multipleBylinesByRole":{"editedBy":{"id":"dXNlcjoxOTc=","databaseId":197,"userId":197,"avatar":{"url":"https://secure.gravatar.com/avatar/de3f161a0dddef441091e8d3dcc69baa5c485a01314d2cdeb967be0c26aecc86?s=96&d=mm&r=g","size":96,"__typename":"Avatar"},"description":"Marie White is a Writer/Editor for SmartAsset, and holds the Certified Educator in Personal Finance (CEPF®) designation. She received her English degree from Stevenson University, with a focus on writing and communications. Marie has more than 15 years of experience working with financial content, having written for publications such as The Oxford Club, Agora Financial and The Trading Pub. Here, she covered topics ranging from stock market news to dividend stock investing and options strategies, as well as real estate investing.","additionalMeta":{"expertise":null,"__typename":"User_Additionalmeta"},"email":null,"firstName":"Marie","fullName":"Marie White, CEPF®","lastName":"White, CEPF®","name":"Marie White, CEPF®","postCount":{"pageInfo":{"offsetPagination":{"total":1,"__typename":"OffsetPaginationPageInfo"},"__typename":"UserToPostConnectionPageInfo"},"__typename":"UserToPostConnection"},"slug":"mwhite","__typename":"User"},"reviewedBy":null,"writtenBy":{"id":"dXNlcjo5NA==","databaseId":94,"userId":94,"avatar":{"url":"https://secure.gravatar.com/avatar/7c731dd1727acb7246e8305663a0f7b141e21e77a35763773a94c0b236d369f5?s=96&d=mm&r=g","size":96,"__typename":"Avatar"},"description":"Eric Reed is a freelance journalist who specializes in economics, policy and global issues, with substantial coverage of finance and personal finance. 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Here's what to consider.","metaKeywords":"","metaRobotsNofollow":"follow","metaRobotsNoindex":"index","readingTime":8,"title":"I'm 50 With $650k in My 401(k). Should I Pivot to Roth Contributions?","__typename":"PostTypeSEO"},"slug":"50-650000-401k-roth-contributions","status":"publish","title":"I’m 50 With $650k in My 401(k). Should I Pivot to Roth Contributions?","postType":"post","subtitle":null,"uri":"/retirement/50-650000-401k-roth-contributions","tags":{"nodes":[{"name":"news-sitemap","__typename":"Tag"}],"__typename":"PostToTagConnection"},"__typename":"Post","adPageGroupOverride":null,"bylines":{"writtenBy":{"id":"dXNlcjo5NA==","databaseId":94,"userId":94,"avatar":"$55","description":"Eric Reed is a freelance journalist who specializes in economics, policy and global issues, with substantial coverage of finance and personal finance. He has contributed to outlets including The Street, CNBC, Glassdoor and Consumer Reports. 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At age 50, Roth contributions might be valuable, for the right household.

","

With a Roth portfolio, the question is balancing the opportunity costs against long-term savings. Here’s the general rule of thumb:

","

The earlier in life you start contributions, the more your Roth’s untaxed gains will offset its upfront taxes.
The later in life you start contributions, the more your opportunity cost of income taxes will outweigh the portfolio’s untaxed growth.

","

For most households, if you get started in your 20s and 30s, a Roth’s untaxed growth will typically generate benefits that outweigh the costs. Households that get started in their 60s will generally spend more on upfront taxes and opportunity cost than they’ll save on taxes.

","

If you get started between the ages of 40 and 50, however, the math gets trickier.

","

For example, say that you’re 50 years old with $650,000 in your 401(k). Should you pivot to Roth IRA contributions? The answer depends on your overall finances. Here’s how to think about it. And if you need more personalized help with this or other retirement planning questions, considering reaching out to a financial advisor.

","

What Are Roth Contributions?

","

A Roth portfolio is a form of tax-advantaged retirement plan called a post-tax account. There are two types of post-tax retirement accounts: Roth IRAs and Roth 401(k)s. A Roth IRA is available to all households, while a Roth 401(k) is only available if your employer offers one. While Roth 401(k) plans are relatively uncommon, they have become more widely available in recent years.

","

You fund a Roth portfolio with money on which you’ve already paid income taxes. You get no tax breaks at all for a Roth contribution. Once invested, the assets grow untaxed and, later in life, you pay no taxes on your withdrawals, neither the principal nor the returns.

","

In fact, withdrawals from a Roth account don’t count toward your taxable income at all. This, in turn, can help with systems such as Social Security benefit taxes, Medicare premiums and Medicaid eligibility. It also exempts Roth accounts from RMD rules.

","

With a Roth contribution, you fund your portfolio with earned income. This is money that you have earned through work, and which is eligible for income taxes. You cannot contribute to a Roth portfolio, or any other tax-advantaged retirement account, with money that is not considered earned income. Most notably, this means that you cannot make contributions from investment returns.

","

Like all tax-advantaged retirement accounts, the IRS limits how much money you can contribute to a Roth portfolio each year. Roth IRAs share the same limit as all IRA accounts. As of 2025, that limit is $7,000 per year, with an additional $1,000 per year in catch-up contributions allowed for those aged 50 and over. Roth 401(k)s share the same limit as all 401(k) accounts. As of 2025, that’s $23,500 per year, plus $7,500 in catch up contributions for those aged 50 to 59, and up to $11,500 in catch-up contributions for those 60 to 63.

","

Roth Portfolio vs. Traditional 401(k)

","

A traditional 401(k) is a form of tax-advantaged retirement account called a “pre-tax” portfolio. With these portfolios, you get a full tax deduction for all contributions made each year. This effectively lowers the cost of contributing to your retirement portfolio, allowing you to contribute and save more money over the long run.

","

For example, say you pay a 20% effective tax rate and contribute $23,500 to your 401(k). If you had paid taxes on that money, it would have cost $4,700 ($23,500 * 0.2). However, since your 401(k) contribution is untaxed, you have that additional $4,700 to invest. You can use this money to either make your 401(k) contribution effectively cheaper, or you can use it as capital in an IRA or a taxed portfolio.

","

However, when you withdraw this money in retirement, you pay income taxes on the full amount withdrawn (principal and returns). This is as opposed to a Roth portfolio, where you pay no taxes on your withdrawals, and a taxed account, where you pay a mix of income and lower capital gains taxes depending on your assets.

","

This sets up the tradeoff between a Roth portfolio and a traditional 401(k).

","

A Roth portfolio comes at an upfront cost. When you make a contribution or a conversion, the upfront taxes mean that you have less overall money to invest. Pre-tax accounts, by contrast, let you keep the untaxed portion of that income as investable capital. However, in retirement, a Roth portfolio lets you keep all of your money, while you pay full income taxes on withdrawals from a pre-tax account.

","

For example, take someone who pays a 20% effective tax rate. They have $5,000 to invest each year in an account that will grow at 8% each year. A Roth IRA investment might have the following profile:

","

Account: Roth IRA
Post-Tax Investment: $4,000 (Income Taxes of $1,000)
Portfolio After 30 Years: $493,383
4% After-Tax Withdrawal Value: $19,735 (Untaxed Withdrawals)

","

Account: Traditional 401(k)
Post-Tax investment: $5,000 (Untaxed Contributions)
Portfolio After 30 Years: $616,729
4% After-Tax Withdrawal Value: $23,662 (Income taxes of approximately $1,007)

","

The outcome will differ based on your specific situation, but that’s the point. Sometimes, a Roth portfolio’s untaxed status will far outweigh any additional returns you could have generated with a pre-tax portfolio. Other times, the additional capital of a pre-tax portfolio will outweigh the tax savings.

","

Consider reaching out to a financial advisor to discuss your circumstances and strategy.

","

Should You Pivot Your 401(k) Contributions?

","

Here, you have $650,000 in a 401(k) at 50 years old. Should you pivot and start contributing to a Roth portfolio instead?

","

The answer is… it depends.

","

First, consider your financial goals. If you’re looking to diversify your income streams in retirement, then this might be a strong approach. You already have a well-funded retirement account. Even with no further contributions, at a mixed-asset 8% rate of return, this portfolio could be worth more than $2.4 million by age 67, so you have some room to take risks and invest for a different tax and RMD status. If you’re having trouble determining which option might be best for you, consider consulting with a financial advisor.

","

The same is true if you’re looking to bolster your estate planning. A Roth portfolio will carry significant value for your heirs so, again, this could be a good move.

","

The question gets more complicated if you’re looking to simply maximize your after-tax income. First, look into whether your employer offers a Roth 401(k) program. If so, then you can pivot entirely and start making all of your retirement contributions to a Roth portfolio. If not, then you’ll need to fund a Roth IRA. At age 50, the maximum contribution is $8,000. You’ll need to put any additional contributions into your 401(k) (typically recommended) or a taxed portfolio (less preferred).

","

Also, consider how your 401(k)’s pre-tax status affects your investment capital. To put it another way, once you begin paying taxes on these contributions, will you be able to contribute the same amount of money to your Roth portfolio? Or will you need to reduce your contributions based on the taxes? A Roth portfolio is often a good idea if you would make the same investments regardless of tax status, neither reducing your investment to account for taxes nor increasing it to take advantage of tax deductions.

","

For example, say you can afford to make the maximum $31,000 catch-up contribution to a 401(k) plan. You will make this contribution regardless of its tax status, either paying the extra taxes or accepting the tax break without adjusting your financial strategy. In that case, you have the option of about $1.04 million worth of portfolio growth on which you’ll pay taxes in retirement, or on which you won’t. In that case, the choice is relatively clear.

","

This is the core tradeoff to consider at age 50, with about 17 years left until full retirement age, you still have the time to grow realistic wealth in this portfolio. You can potentially take real advantage of the untaxed returns that a Roth portfolio can offer. The question is how you will invest, and how the new tax status of your contributions will change your math.

","

Either way, consider speaking to a financial advisor to make sure you’ve got all your bases covered for a comfortable retirement.

","

Bottom Line

","

You’ve hit 50, should you pivot to Roth IRA contributions? The answer depends entirely on your personal financial position and your long-term plans. However, this far out from retirement, you still have time for this to save you some real money.

","

Tips on Retirement Tax Management

","$66","

Photo credit: ©iStock.com/zamrznutitonovi

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\n","featuredImage":{"id":"cG9zdDoyNzgxMTY=","databaseId":278116,"altText":"You can perform a Roth conversion at any age, and potentially produce a noticeable boost to your retirement income.","date":"2025-02-24T09:59:30","fileSize":140974,"mimeType":"image/jpeg","modified":"2025-02-24T10:00:29","sourceUrl":"https://smartasset.com/wp-content/uploads/sites/2/2025/02/iStock-2162369939.jpg","__typename":"MediaItem"},"modified":{"datetime":"2025-3-1","readable":"March 1, 2025","readableExtended":"March 1, 2025, 10:34am ET"},"multipleBylinesByRole":{"editedBy":{"id":"dXNlcjoxOTc=","databaseId":197,"userId":197,"avatar":{"url":"https://secure.gravatar.com/avatar/de3f161a0dddef441091e8d3dcc69baa5c485a01314d2cdeb967be0c26aecc86?s=96&d=mm&r=g","size":96,"__typename":"Avatar"},"description":"Marie White is a Writer/Editor for SmartAsset, and holds the Certified Educator in Personal Finance (CEPF®) designation. 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You can perform a Roth conversion at any age, and potentially boost your retirement income. However, this strategy often produces more positive results the sooner it’s done. One reason is that you have to pay taxes on converted funds at the time of the conversion. After all, money sent to the IRS can’t be invested and grown. Roth conversions may make the most sense if you expect to be in a lower tax bracket after retirement, as well as if you plan to leave retirement savings to any heirs as part of your estate plan. Ultimately, whether converting a 401(k) at 62 is your best move depends on your individual circumstances beyond just the amount in it.

","

A financial advisor can help you assess your options.

","

Breaking Down a Roth Conversion

","

If you’re 62 and have $850,000 in a 401(k), before committing to a Roth conversion, you’ll want to consider several factors. Among other things to think about are your current income, when you plan to retire and how much your income will be in retirement.

","

Let’s say you currently have $100,000 in taxable income, are single and will retire at 66. If you convert the entire 401(k) now, your taxable income for this year will equal $950,000, including $850,000 in converted funds plus $100,000 in other taxable income. This will put you in the 37% marginal income tax bracket, with an income tax bill of approximately $304,284, as calculated by SmartAsset’s Federal Income Tax Calculator.

","

If you use some of the converted funds to pay taxes, that money won’t be available for tax-free growth for four more years. Of course, you’ll still have $545,176 in your Roth account after deducting tax payments. Four years of 7% annual growth from investing that will produce a balance of $714,615, according to SmartAsset’s Investment Return & Growth Calculator.

","

Other Considerations

","

Now let’s look at the scenario of not converting. In four years, assuming 7% average annual growth, your $850,000 401(k) balance will have increased to $1,114,177. That’s $399,562 more than you would have after converting.

","

However, you also have to consider taxes on your income in retirement. Start with Social Security. Assuming you claim at age 66, those benefits are likely to be $40,560 a year, according to SmartAsset’s Social Security Calculator.

","

Now add 401(k) withdrawals. At the 4% safe withdrawal rate from a $1,114,177 balance, you’ll take out about $44,567 in the first year of retirement. (RMDs won’t be a factor since you’re already withdrawing more than the scheduled RMD amount.)

","

With that much income, 85% or $34,476 of your Social Security benefit likely will be taxable. So will the $44,567 from your 401(k), so total taxable income will be $79,043. Tax on that amount comes to an estimated $15,277. Subtracting the tax charge from total income yields after-tax income of $63,766.

","

Next, consider the conversion scenario. A 4% safe withdrawal from your $714,615 Roth balance at age 66 produces $28,584 in tax-free funds. Because the Roth withdrawal doesn’t increase the combined income figure used to figure taxes on Social Security benefits, those benefits will also be tax-free. Total after-tax income will be $28,584 from the Roth and $40,560 from Social Security or $69,144.

","

Using this simplified model, converting could provide additional annual income in retirement of $69,145 minus $63,766, or $5,379. You may be able to boost this further if, instead of converting the entire 401(k) now, you convert it gradually over several years. Note that a gradual conversion may not completely empty the account by the time RMDs become due. However, that’s not all bad, as RMDs due on the reduced balance would be smaller and have less of an effect on your taxes.

","

Fine-Tuning Your Roth Conversion

","

There are other considerations to keep in mind. Estate planning could be one. If you plan to leave retirement savings to your heirs, a bequest from a Roth account will be more valuable because they won’t have to pay taxes on it.

","

Also consider marital status. If you are married now or may marry later on, consider how filing as a married couple will change both your taxable income and tax bracket. Also look at what might happen when one spouse dies and the survivor begins filing singly again.

","

There’s more. Income from conversion also could cause your Medicare premiums to rise sharply. In addition, you may become ineligible for some tax credits like the Premium Tax Credit. Finally, you’ll want to be sure you’re certain this is something you want to do before going ahead with a conversion, because it’s irreversible and can’t be undone.

","

A financial advisor can help you determine whether or not a Roth conversion suits your situation and needs.

","

Bottom Line

","

Converting an $850,000 401(k) to a Roth account at age 62 is legally and technically feasible, and the strategy could potentially save on taxes down the road, as well as provide your heirs with a tax-free inheritance. However, it may not have a large overall impact on your retirement finances because of the requirement to pay taxes on any converted funds as soon as you perform the conversion. Your individual circumstances, including your current income, marital status, expected age at retirement and tax bracket after retirement, are all factors to consider when assessing whether conversion is the best move for you.

","

Retirement Tips

","$79","

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Withdrawals from an IRA that start before required minimum distributions (RMDs) are due can reduce the amount of your future RMDs, although not on a dollar-by-dollar basis. RMDs are calculated based on the balance in your retirement account, not on previous withdrawals. However, by reducing the balance in your account, early withdrawals can reduce the […]

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","

A financial advisor can help you calculate your future RMDs and plan for how to manage them.

","

Walking Through RMD Management

","

There are many tradeoffs to consider when planning an RMD strategy. There are unknowns at play regarding market returns, and interwoven tax implications for many routes.

","

For example, if you are 65, in most cases you’ll be subject to RMDs in eight years, after you turn 73. Assuming you have a $500,000 IRA account now, you could withdraw $50,000 per year for the next eight years. And assuming a 7% annual return on investments made in your IRA, your account would have about $272,871 after you reach age 73. At that point, based on the IRS tables, your first-year RMD would be $10,297.

","

Now let’s consider how this would reduce your RMDs compared to not taking any early withdrawals. In eight years, at a 7% average annual return, the $500,000 balance in your IRA would have grown to $859,093, according to SmartAsset’s Investment Return and Growth Calculator. Based on that balance, your first-year RMD would be approximately $32,418.

","

In each case, you’ll have to weigh the tax obligations, which will depend on your other taxable income sources, to determine what suits your current needs and future goals best.

","

Understanding Required Minimum Distribution Fundamentals

","

Pre-tax retirement savings accounts like your individual retirement account (IRA) let you defer the need to pay taxes on funds you contribute to the account until a later date. However, these taxes are not completely avoided, only delayed. When you withdraw money later on, the withdrawals are taxed as ordinary income.

","

You can’t just leave the money in the IRA to grow tax-free forever, due to required minimum distribution (RMD) rules. These rules require you to withdraw a specified amount of money each year after you reach a certain age, usually 73. The amount of the RMD is calculated each year based on your age and the amount in your account. The IRS publishes tables you can use to calculate the amount of your required RMD. For instance, if you are 73, you can figure out the RMD by dividing the balance in your account by 26.5.

","

Retirement savers who are concerned about paying income taxes in retirement may employ strategies to avoid or reduce RMDs. That’s because the RMDs are treated as ordinary income and, if they’re large enough, can cause your total taxable retirement income to increase so much that it pushes you into a higher marginal income tax bracket.

","

IRA to Roth IRA Conversion

","

One way to manage RMDs is to convert all or part of the money in your IRA into a Roth IRA. A Roth conversion strategy avoids RMDs, because these accounts are not subject to RMD rules. Future withdrawals from the Roth account are also tax-free, when done according to the rules. That means they won’t cause your Social Security payments to be taxed, among other potential benefits.

","

Funds converted from an IRA to a Roth are immediately taxed as ordinary income, however, so this can result in a sizable current tax bill. Generally, a Roth conversion makes the best sense when you expect to be in a higher tax bracket after you retire. It may also be a smart move if you plan to leave retirement fund assets to your heirs, as Roth assets can be passed on tax-free.

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Early Withdrawals

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Early withdrawals are an easier and somewhat less effective way to manage RMDs. You can, by withdrawing from your IRA before your RMDs begin, reduce the amount in your IRA. If you do that, future RMDs will be calculated on the smaller amount and so will be smaller, as well.

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A financial advisor can help you create a plan for taking your RMDs that aligns with your personal financial situation.

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Fine-Tuning RMD Strategies

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As shown in the example, you can potentially reduce your RMD by about $22,121 by beginning withdrawals before RMDs are due. Bear in mind, however, that you’ll owe taxes on withdrawals as ordinary income. A $50,000 IRA withdrawal will increase your income and may raise you to a higher marginal tax bracket.

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For instance, if you have $100,000 in annual taxable income now and file single, you’re likely in the 22% marginal bracket and owe about $13,841 in federal income tax. Adding $50,000 in taxable income will move you into the 24% bracket and produce a tax bill of $37,013.

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If you were to choose the Roth conversion route, you may be able to reduce or manage the tax bill by gradually converting IRA funds to the Roth over several years. If you converted $50,000 each year, it would have the same effect on your current tax bill, but the money would still be able to grow tax-free in the Roth account. Of course, you can only follow this strategy if you don’t need the retirement fund withdrawals to pay for current living expenses, and you can adjust withdrawal amounts to suit a strategy that fits your needs.

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Consider matching with a fiduciary financial advisor to speak about your personal situation.

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Bottom Line

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Starting IRA withdrawals early can potentially reduce future RMDs, but only indirectly. Anything you do to reduce the balance in your IRA will reduce RMDs, which are calculated based on your age and account size. Taking regular sizable withdrawals starting at age 65 could reduce your IRA balance enough to make a significant difference in future RMD amounts. However, you’ll owe taxes on withdrawals as ordinary income now. You may also want to look into a Roth conversion as another way to manage RMDs.

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Retirement Planning Tips

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