A couple in their 50s with $1.5 million spread across traditional 401(k) accounts is questioning whether now is the right time to begin Roth conversions. The strategy involves moving pre-tax retirement funds into after-tax Roth accounts, which can reduce future required minimum distributions and tax burdens. However, the decision is not straightforward and depends on several personal financial factors.
The couple’s previous financial adviser made costly mistakes, leaving them wary of aggressive tax strategies. That caution is understandable, as Roth conversions must be executed with precision to avoid unnecessary tax penalties. Converting too much in a single year can push taxpayers into higher brackets, triggering larger tax bills than anticipated.
Current tax rates play a significant role in the timing of conversions. With federal income tax brackets scheduled to revert to higher levels after 2025, some advisors suggest acting before that change. Yet locking in a conversion at today’s rate only makes sense if future tax rates are expected to rise for the individual’s specific situation.
The couple should first project their income for the next several years, including expected Social Security benefits and any other retirement income. A large traditional 401(k) balance means required minimum distributions will likely be substantial, potentially pushing them into higher brackets later. Partial conversions, spread over several years, can help manage this by filling lower tax brackets now.
Another factor is the source of funds for paying taxes on the conversion. Using cash outside of retirement accounts keeps the full amount in the Roth growing tax-free. Paying taxes from the 401(k) itself reduces the overall conversion benefit and defeats the purpose of maximizing tax-free growth.
Healthcare costs and the timing of Medicare enrollment also matter, as higher income from conversions may increase premiums. For couples in their 50s, planning conversions before age 63 may help avoid the two-year lookback period that affects Medicare Part B and Part D costs. This adds a layer of complexity that a qualified planner can help navigate.
The couple should also consider their estate plans and charitable giving strategies. Roth accounts do not carry required distributions, making them valuable for heirs who will inherit tax-free assets. For those planning to donate to charity, traditional accounts can remain useful, as qualified charitable distributions can satisfy RMDs without increasing taxable income.
Given the previous adviser’s failures, the couple is right to proceed with caution. A step-by-step approach, running multiple tax scenarios, and consulting a fee-only fiduciary can provide clarity. Roth conversions are not a one-size-fits-all move, but for this couple, the answer may be yes—just not all at once.
