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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 62 and retired with $700,000 in your 401(k). Should you convert to a Roth IRA?
0:16 Introduction
0:52 Case Study
1:06 Disclaimer
1:47 Plan for Everything
2:20 Current Situation
2:53 Roth Conversions
4:55 Tax Brackets
5:52 401(k) vs Roth IRA
10:07 Starting Distribution Tax
10:47 How Much to Convert?
11:54 Conclusion
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I’m 62 And Retired With $700,000 In My 401K Should I Convert To A Roth IRA?
One of the crucial decisions individuals must make as they approach retirement is what to do with their retirement savings. For those who have accumulated a significant amount in a 401K, the option to convert it to a Roth IRA may seem tempting. However, before making any hasty decisions, it is essential to carefully evaluate the advantages and disadvantages of such a conversion.
Firstly, let’s briefly understand the basic difference between a traditional 401K and a Roth IRA. A traditional 401K allows individuals to contribute pre-tax income, reducing their taxable income during their working years. Conversely, a Roth IRA receives post-tax contributions, meaning individuals pay taxes on the money before it is deposited into the account, allowing for tax-free withdrawals during retirement.
When contemplating a conversion, one factor to consider is your current tax situation. If you expect your tax bracket to decline significantly during retirement, it might be more advantageous to remain invested in your 401K, as the tax savings during your working years would likely outweigh the tax-free withdrawals in retirement. However, if you anticipate being in a higher tax bracket during retirement, a conversion to a Roth IRA could be an excellent choice.
Another point to consider is the impact of required minimum distributions (RMDs) on your retirement income. Upon reaching the age of 72, individuals with traditional 401K accounts are obligated to withdraw a certain amount annually. These withdrawals are subject to income tax. Conversely, Roth IRAs do not have RMDs during the account owner’s lifetime. Therefore, if you foresee not needing the funds from your retirement accounts immediately and wish to leave a significant portion to your heirs, converting to a Roth IRA may provide more flexibility and estate planning benefits.
It’s also essential to assess your cash flow and potential tax liability during the conversion process. Converting a substantial amount from a 401K to a Roth IRA would generate a significant taxable event, as the converted funds would be considered income in the year of conversion. If you lack sufficient cash reserves to cover the tax bill, it might not be wise to convert the entire amount at once. A partial conversion could be a more reasonable approach, spreading the taxable event over a few years to minimize the tax impact.
Lastly, it is crucial to consult with a qualified financial advisor or tax professional who can thoroughly evaluate your specific circumstances. They can help determine if a conversion to a Roth IRA aligns with your retirement goals, tax situation, and overall financial plan.
In conclusion, the decision to convert a 401K to a Roth IRA depends on several factors. Analyzing your tax situation, considering future income needs, assessing potential tax liabilities, and seeking professional guidance are all essential steps. Make sure to carefully evaluate all the pros and cons specific to your circumstances before making a final decision.
Do you expect this IRA to grow or shrink?
With stocks in taxable and all your fixed income in IRA and all withdrawals from IRA, the IRA part of portfolio shouldn't grow much causing little worry about taxes from it in future.
I would have seriously considered delaying Social Security to spend down some of the traditional IRA
The only way is to raise taxes? You can only raise taxes so much or you will kill the economy. Taxes take away from spending and we live in a consumer economy
This couple with 700k and 3k a month SS will not see heavy tax raises (60k is very little in a lot of places in this country for a couple)
I would not do any conversions at 22%
This couple has a measly SS check. They really barely have enough to have a tax problem. Their SS will get taxed if they convert too much. At least one of them should have waited to take SS. Obviously converting at the 12% bracket makes sense. But, they will not have a 20% tax rate on 60k of income, you didn’t even talk about deductions.
They are only 62, 10 years away from RMD. So they do have time to do several small conversions. One thing you might have missed is the medical expenses. The conversion could raise their MAGI which could increase their ACA or part B cost.
Great videos. Sorry if I missed the answer to this question in a video. When the conversion occurs, and the tax event is triggered, do the taxes owed come out of the transaction, or does one have to obtain that from another source? Thanks!
This is an awesome video. I would also add one important consideration as well — the current bear market. When stocks are down, that is the best time to do a Roth Conversion, because the dollar value (and consequent tax bill) is lower than when stocks are inflated. Just like you correctly predict that taxes are likely to go higher in the coming years, stocks are likely to go higher as well. Accordingly, it is better to convert a 401k portfolio now rather than waiting for taxes to rise and the value of the portfolio to increase. Nicely done!
I have watched a number of your chats, and while the information is valid, it is very repetitive. You always seem to use the same example for conversions, rather than gearing the conversion to the specific situation, such as showing that this couple should likely convert approx 20-30k this year (up to the the end of their 12% tax bracket), or possibly delay taking SS and living on more of their cash while they convert more of the 401k to a Roth.