At Age 60 With $150k Income, Is Converting $50k Annually To A Roth Do It?

sinaltik December 8, 2024

0 0 6 minutes read

There are many ways to analyze your retirement plan. Sometimes, if we have a lot of concrete information, we can start by using numbers. If X, then Y, and the next steps are to decide what risks and consequences you are comfortable with.

But sometimes, the first place is questions. As you build your retirement plan, it’s important to know… well, what’s important. What kind of information do you need? How will you use that information to create a specific plan, dollars and cents?

To understand that, let’s look at a less obvious situation. Say you are 60 years old. You have a comfortable income of $150,000 a year and are considering a dramatic Roth conversion to avoid the need to take required minimum taxable distributions in your account at age 70 and older. But this means you’ll take more tax hits now while you’re still working. What do you need to know to decide if this program will work?

Here are four questions to ask yourself as you make this plan. You should also consider consulting a trusted financial advisor who can assist with professional advice tailored to your goals.

This should be the first question with any financial plan. What are you trying to do?

Here, you’re looking to make an impressive $50,000 Roth conversion at a time. The idea here is to avoid RMDs by moving money from an account that requires RMDs (your IRA) to an account that is exempt from RMDs (a Roth IRA). But why?

For example, are you looking to save your retirement account for your heirs? Are you looking to reduce your income taxes? Are you simply looking to reduce the complexity of your retirement savings?

Although avoiding RMDs with Roth conversions may lead to lower taxes in retirement, we raise this issue because avoiding RMDs may not always be an option for you. It can be a smart move, like trying to build a high net worth legacy. But in some cases, such as reducing taxes, you may spend more money than you might save in other cases. This can depend on things like your tax bracket now and when you retire, the size and growth of your account, and more.

So start here. You can simply identify the financial tools and strategies you use. Find out exactly what you want that financial instrument to do for you.

Most retirement plans will include income from Social Security. This is not because those benefits will make up the majority of your income, but because they are the most predictable part. From retirement, the government guarantees a minimum income for the rest of your life once you meet the qualifications. So you can start planning there.

So the number one thing you should look at is, what benefits will you get?

Here, he earns $150,000 a year. That would give us a sense of potential social security. Based on the SSA’s instant benefits calculator, if you wait seven years and collect at full retirement age you could collect about $3,315 a month in today’s dollars. If you wait until age 70, you could collect about $4,202 a month.

But the calculator is back-of-envelope. It makes a lot of assumptions about your income history, some or all of which may not be accurate. To plan for yourself, use the SSA’s full benefits calculator that can use numbers based on your actual work credits.

Knowing your income will tell you what kind of income you can plan for, which will help you plan investments for growth versus maintenance. For example, the higher your earnings, the more you can save with a tax-free Roth account. On the other hand, the lower your returns, the more you may want to save your investment for future growth.

A financial advisor can help you work out your retirement income and taxes based on different assumptions. Get matched with a financial advisor today.

Next, we need to look at the structure of your retirement portfolio. What are they? For example, do you have a 401(k)? An IRA? Both? Or do you have a 403(b), or pension?

This is the second question we should ask.

Here, we know you already have an IRA. Do you have other goods? For example, will you be adding to an existing Roth portfolio, or will you be converting your IRA to a newly created Roth?

What, if any, other retirement accounts do you have? If you make $150,000 a year, is that as a W-2 job? If so, do you have a 401(k) or other employer-sponsored portfolio?

How you answer this question can significantly change your approach to IRA conversion. For example, Roth conversions often have a smaller family or early retirement benefit. However, if you’re going to use this Roth portfolio for additional income, that can change the equation dramatically. So, whether or not you have a 401(k) is an important question. The same is true if you currently have a well-funded Roth. If you already plan to take tax-free income, you may need to pay some taxes to plan for a completely tax-free retirement.

Now, finally, we get to the heart of the matter. How much money do you have? This will make it very clear how your conversion works, and what kind of benefits you see. For example, a few key issues that your portfolio assets will define include:

How will this affect your taxes?
How many years will the full transformation take?
Do you need to schedule RMDs at all?

For example, depending on your goals (see above) you may not need to plan for RMDs at all. If your income needs exceed those requirements, you will withdraw this amount anyway.

Take our issue here. He makes $150,000 a year. In general, most retirees need about 80% of their pre-retirement income to maintain their standard of living, so say $120,000 a year in combined income. Our quick estimate already gives you about $40,000 a year from Social Security, which gives you $80,000 a year in portfolio deductions. Your RMDs won’t exceed that unless you have more than $2.1 million in pre-tax investments at age 73.

This is not always the end of the analysis, to be sure. Your savings may outlast that time, and if you have assets spread across several pre-tax portfolios you’ll need to keep an eye on withdrawals at all times. But it’s worth making sure that RMDs aren’t a financial paper tiger.

Speaking of taxes, be sure to schedule a tax return event.

Here, a change of $50,000 can mean the difference between $150,000 a year and $200,000 a year in taxable income. This will increase your taxes by an average of $12,324 per year. It is best to make sure that these tax trade-offs will be worth the benefit of avoiding RMDs in the long run.

Consider consulting with a financial advisor who can help you weigh the potential consequences of a Roth conversion in your situation.

Answering these questions will help you decide if the conversion costs are worth the benefits. Making a financial plan depends on knowing your goals and assets. In other words, what do you want to do and what are you trying to do? For example, if you’re considering a Roth conversion, start with these four questions to decide if it’s really right for you.

Is your Roth conversion worth it? Roth conversions are one of the more complex issues in retirement planning. It has huge back-end benefits, no income taxes, set against very high up-front costs, conversion taxes. So, now that we’ve looked at the questions, let’s start diving into the answers.
A financial advisor can help you create the perfect retirement plan. Finding a financial advisor doesn’t have to be difficult. SmartAsset’s free tool matches you with up to three vetted financial advisors serving your area, and you can have a free introductory call with your matching advisor to decide which one you feel is right for you. If you’re ready to find an advisor to help you reach your financial goals, get started now.
Keep an emergency fund on hand in case you run into an unexpected expense. An emergency fund should be liquid — in an account that isn’t exposed to significant fluctuations like the stock market. The tradeoff is that the value of cash can erode due to inflation. But a high interest account allows you to earn compound interest. Compare savings accounts from these banks.
Are you a financial advisor looking to grow your business? SmartAsset AMP helps advisors connect with leads and provide automated marketing solutions so you can spend more time converting. Learn more about SmartAsset AMP.