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Would a Roth Conversion improve my tax efficiency? What happens if I run out of income before I run out of life? Will my spouse be ok? In this study, we’ll take a look at being 69 and retired with $1,600,000 in your 401(k). Should you convert to a Roth IRA?

0:25 Introduction
0:58 Case Study
1:05 Plan for Everything
1:40 Current Situation
2:17 Disclaimer
2:54 Roth Conversions
4:30 401(k) vs Roth IRA
9:42 Tax Brackets
11:17 Impact of RMDs
12:10 Starting Distribution Tax
13:11 How Much to Convert?
13:38 Medicare Part B
14:35 Conclusion

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As you near retirement age, it’s important to evaluate where your money is invested and whether any changes need to be made. One option to consider is converting your 401(k) to a Roth IRA. But is this the right move for you? Let’s explore the pros and cons.

First, it’s important to understand the difference between a 401(k) and a Roth IRA. A 401(k) is a traditional retirement account that allows you to contribute pre-tax dollars, which reduces your taxable income in the year of contribution. However, when you withdraw funds in retirement, they are taxed at your income tax rate at that time. A Roth IRA, on the other hand, is funded with post-tax dollars, meaning you pay taxes on the money before it enters the account. However, when you withdraw funds in retirement, they are not subject to income tax.

One advantage of converting your 401(k) to a Roth IRA is that you can pay taxes on your contributions now, while you’re in a lower tax bracket, instead of waiting until retirement when you may be in a higher tax bracket. This can save you money in the long run. Additionally, since there are no required minimum distributions (RMDs) for Roth IRAs, you can let the funds continue to grow tax-free for as long as you’d like.

However, there are also potential drawbacks to consider. Converting to a Roth IRA means you will have to pay taxes on the entire balance of your 401(k) in the year of conversion, which could be a significant expense. Additionally, if you do not intend to withdraw funds from your Roth IRA until late in retirement, you may miss out on the potential tax benefits of delaying taxes through a traditional 401(k).

So what should you do? The decision to convert your 401(k) to a Roth IRA will depend on your individual financial goals and circumstances. It may be beneficial if you anticipate being in a higher tax bracket in retirement, or if you want the flexibility of not having to take RMDs. However, be sure to consider the immediate tax implications and whether it’s worth it to pay taxes now versus later.

It’s always a good idea to consult with a financial advisor before making any significant changes to your retirement plan. They can help you evaluate the pros and cons of various options and determine the best course of action based on your individual situation. With careful consideration and expert advice, you can ensure your retirement funds are invested in a way that meets your current and future financial goals.