I’m 62 With $1.5M in an IRA. Should I Move $150k Annually to a Roth IRA to Reduce RMDs?

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For a 62-year-old individual with a substantial $1.5 million in a traditional IRA, it may be strategically beneficial to consider converting $150,000 annually to a Roth IRA. Doing so can help mitigate the impact of required minimum distributions (RMDs). These mandated withdrawals can unexpectedly inflate your tax obligations in retirement, contributing to your taxable income even when you may not need the funds.

Executing thoughtful Roth conversions lets you transfer funds from IRA accounts subject to RMDs into Roth accounts, which are exempt from such forced withdrawals during your lifetime. Even though you must pay taxes at the time of conversion, this approach could ultimately lower your total tax burden throughout retirement while enhancing your financial predictability. It is wise to consult with a financial advisor for personalized retirement strategy tailored to your circumstances.

The Internal Revenue Service mandates that account holders begin taking RMDs from accounts like IRAs, 401(k)s, and other tax-deferred retirement plans starting at age 73. The amount to be withdrawn is calculated based on your account balance and life expectancy.

Following the enactment of the SECURE 2.0 Act, the age for RMDs was raised to 73 for individuals who turned 72 after December 31, 2022. In a future adjustment, the RMD age will further increase to 75 for those who reach 74 after December 31, 2032. For example, a 62-year-old in 2024 will not encounter RMDs for the next 13 years.

Each RMD adds to your taxable income, potentially moving you into a higher tax bracket. While it is reasonable to desire to avoid this dilemma, RMDs are obligatory, and failure to comply can result in hefty penalties.

If you need assistance in determining your RMD amounts or exploring strategies to evade them altogether, consulting a financial advisor is highly recommended.

A Roth IRA introduces a viable escape from RMD obligations. Since Roth IRAs do not face RMD restrictions, funds contained in a traditional IRA can be shifted into a Roth account. This prospect fuels the interest in Roth conversions among savers who aim to avoid the potentially unfavorable tax consequences associated with RMDs.

However, it is crucial to understand one significant aspect: traditional IRAs entail funds that have not been taxed yet, making withdrawals taxable. Conversely, Roth withdrawals are tax-free; hence, converting funds from a traditional IRA to a Roth entails paying taxes on the converted amount immediately.

Yet, despite the immediate tax payment, smaller conversions now could yield a lower total tax obligation over your lifetime when compared to the unpredictability of RMDs down the line. It’s essential to manage the conversion strategy wisely; converting too much too quickly could spike your immediate tax liabilities unnecessarily.