IRS Rules Drive Strategic Roth IRA Conversions for Retirees
Financial experts recommend converting traditional IRA balances to Roth accounts to avoid mandatory IRS distributions and manage future tax liabilities.
The Internal Revenue Service requires individuals born in 1960 or later to begin taking required minimum distributions (RMDs) from traditional 401(k) and IRA accounts starting at age 75. For a retiree with a $900,000 balance at that age, the first mandatory withdrawal is approximately $36,600. Because funds converted to a Roth 401(k) or Roth IRA are not subject to RMDs during the original owner's lifetime, financial guidance suggests strategic conversions starting as early as age 62 or 63.
One proposed strategy for a 63-year-old with a $960,000 IRA involves converting the balance into a Roth IRA over eight years in $120,000 increments. This approach aims to create tax-free income in retirement, potentially yielding $5,481 per month through a 6.9% asset blend including ETFs from Amplify, Goldman Sachs, FT Vest, and Janus Henderson, alongside holdings in W. P. Carey and Sixth Street Specialty Lending.
However, the timing and scale of conversions carry different risks depending on filing status. Single filers converting $120,000 annually may trigger Medicare income-related monthly adjustment amount (IRMAA) surcharges and lose marketplace subsidies, while married couples typically remain below these thresholds. Intuit TurboTax notes that the primary decision for a conversion is whether the current tax rate is lower than the projected rate at the time of future withdrawals.
