An 84-year-old retiree with $8 million in savings is questioning whether Roth conversions still make sense at his age. He and his 77-year-old wife are weighing the tax benefits against the costs of professional advice. They are reluctant to pay a financial adviser 2% of assets, which amounts to roughly $160,000 per year.
Roth conversions involve moving money from a traditional IRA or 401(k) into a Roth account. The converted amount is treated as taxable income in the year of the transfer. In exchange, future withdrawals from the Roth are tax-free, provided certain rules are met.
For older investors, the calculation shifts. The primary benefit of a Roth conversion is avoiding future required minimum distributions, or RMDs, which begin at age 73. Those RMDs can push retirees into higher tax brackets and increase Medicare premiums.
At age 84, the time horizon for tax-free growth is shorter. The account has fewer years to compound before withdrawals are needed or the estate is passed on. However, heirs who inherit a Roth IRA can withdraw funds tax-free over their own lifetimes, which may preserve value across generations.
The couple’s $8 million portfolio likely means they are already in a high tax bracket. Converting large sums would trigger a substantial upfront tax bill. Partial conversions, spread over several years, could manage the tax impact while still reducing future RMDs.
The annual $160,000 advisory fee is a separate concern. That cost is significant relative to the portfolio’s growth potential. Many advisers charge between 0.5% and 1% of assets, making 2% an outlier in the industry.
A fee-only planner or a tax professional could model the conversion scenarios without ongoing asset-based charges. A one-time consultation may provide clarity on whether conversions align with the couple’s estate planning goals.
Charitable giving can also reduce the tax burden. Qualified charitable distributions from an IRA are tax-free and count toward RMDs. This strategy offers an alternative to conversions for retirees who do not need the income.
The decision ultimately depends on the couple’s spending needs, health, and legacy goals. If most of the $8 million is earmarked for heirs, conversions could be advantageous. If the funds are needed for living expenses, the upfront tax cost may outweigh the benefits.
Medicare surcharges add another layer. Higher taxable income from a conversion can trigger income-related monthly adjustment amounts, or IRMAA, which raise Part B and Part D premiums for two years. The couple must factor these costs into their decision.
An 84-year-old is not automatically too old for a Roth conversion. The strategy still works in specific cases, particularly for those with large estates and long-lived heirs. But it requires careful modeling of taxes, premiums, and fees.
The couple’s reluctance to pay high advisory fees is reasonable. They can seek a flat-fee fiduciary or a tax attorney who specializes in retirement distributions. This approach avoids ongoing costs while still providing expert guidance.
Ultimately, the math depends on assumptions about future tax rates, investment returns, and lifespan. A conversion locks in today’s tax rate, which is a hedge against future increases. That certainty can be valuable for estate planning.
The couple should also review their current marginal tax bracket and compare it to projected brackets for their heirs. If heirs are likely to be in a higher bracket, the conversion makes more sense. If they are in a lower bracket, it may be better to leave the traditional IRA untouched.
There is no universal answer. The couple must weigh the immediate tax liability against long-term savings for themselves and their beneficiaries. Professional input, even on a limited basis, can help clarify the trade-offs.
The 2% fee concern is valid. Paying $160,000 annually undermines the very savings a conversion aims to protect. Reducing that cost through alternative advisory arrangements should be a priority before any conversion decision is made.
