65 With An IRA Worth $750,000. Does It Still Make Sense To Do A Roth Conversion? The Answer Will SHOCK YOU!

I Take A Closer Look At This Common Question

If you’re 65 and getting Social Security, you might be thinking about turning your $750,000 traditional IRA into a Roth IRA. The simple answer is yes, you can do it — age and income won’t stop you. However, it’s essential to think about things like taxes, healthcare costs, and planning for the future. If you have a big IRA, it often makes sense to spread the conversion over a few years. Talking to an investment advisor, portfolio manager can help you figure out if a Roth conversion is a good move for you.

COMING SOON! Come check out my US YouTube channel!!

The Basics of Roth Conversions

A Roth IRA conversion means moving money from a traditional PRE-TAX IRA to an AFTER-TAX Roth IRA. You pay taxes on the converted amount now, but the perk is that withdrawals during retirement are tax-free.

Traditional IRAs have mandatory minimum distributions (RMDs) from age 73, possibly leading to higher taxes in retirement. RMD income is treated as regular taxable income, potentially pushing retirees into higher tax brackets. Roth IRAs and Roth 401(k)s, however, don’t follow RMD rules. You can keep the money in the account or withdraw it when needed without owing taxes on your contributions. Just note that income taxes may apply to investment earnings if withdrawn within five years of your first contribution.

If you’re unsure about Roth IRA rules, consider talking to an investment advisor portfolio manger for guidance.

Timing Is Everything

Converting funds from your traditional pre-tax IRA to a Roth account sooner means more years of tax-free growth in your Roth account. This allows you to withdraw Roth funds without facing any taxes.

However, timing is crucial, as you will have to pay taxes on the conversion. It’s a significant factor to consider, especially when dealing with a large IRA. Converting a substantial amount could subject you to the top marginal tax rate of 37%, applied to most or even all of the conversion amount. The exact impact depends on your overall income, deductions, and other contributing factors.

Opting for a gradual conversion allows you to spread the income increase over several years, steering clear of the top marginal tax rate. This approach helps minimize the annual tax burden and the overall amount owed.

Additionally, it’s vital to factor in the timing of Roth IRA fund withdrawals. Withdrawals within five years of the conversion may incur penalties. If you choose to convert your IRA to a Roth progressively over time, each conversion restarts the five-year rule for that specific portion of the funds.

For a clearer understanding of intricate financial moves like Roth conversions, seeking advice from an investment advisor portfolio manager is recommended. Their expertise can guide you through the nuances and ensure that your decisions align with your overall financial strategy.

Converting An IRA Worth $750k…

Converting a $750,000 IRA balance all at once raises a substantial concern due to the significant tax liability that accompanies such a move. A complete Roth conversion of this magnitude could push an individual into the 37% marginal tax bracket.

For a single filer whose Social Security income isn’t high enough to be taxed, adding $750,000 to the current income could result in approximately $238,000 in additional taxes, based on the 2023 tax brackets. Taking a more gradual approach, with $75,000 converted annually over 10 years, this helps mitigate the annual tax impact by keeping the taxable income within the 22% bracket.

Here are some scenarios if you’re a single filer with Social Security income below the taxable threshold of $25,000. This can provide some insights into the potential tax consequences of different conversion strategies.

Scenario 1: involves converting the entire $750,000 at once, placing you in the 37% tax bracket. The resulting federal income tax liability amounts to $237,831. Despite the substantial tax bill, this choice leaves approximately $512,000 in your newly established Roth IRA. This sizable amount in the Roth IRA provides the advantage of potential tax-free withdrawals in the future.

Scenario 2: involves converting $75,000 annually over a span of 10 years, placing you in the 22% tax bracket. The total federal income tax owed over the 10-year period is $88,000.

It’s important to note that during this time, the funds remaining in your IRA continue to grow, ensuring that the IRA is not depleted before the onset of Required Minimum Distributions (RMDs).

As a result of the gradual conversions, the Required Minimum Distributions (RMDs) will be smaller, thereby reducing associated taxation. Nevertheless, retaining funds in a traditional IRA may still result in significant tax implications. The selected strategy strives to strike a balance between the advantages of tax planning and sustained growth within the IRA.

A third alternative is to retain the funds in your IRA without converting and initiate Required Minimum Distributions (RMDs) upon reaching 73, with taxes paid accordingly. While this approach allows you to defer the tax impact, it could result in higher taxes throughout your retirement until the end of your life.

If you find evaluating these options challenging, you can connect with a fiduciary advisor like myself. This advisor can assist you in navigating the complexities of your choices, ensuring that your financial decisions align with your unique circumstances and long-term goals.

Which Way Is Best?

Determining the best course of action for Roth conversion may not have a clear-cut answer. Various factors should be considered in evaluating if and how much Roth conversion makes sense:

1. Compare current and future income tax rates: Assess the implications of converting now versus the potential tax rates in the future.
2. Account for Required Minimum Distributions (RMDs) and estate plans: Consider the impact of RMDs and how your estate plans align with the conversion strategy.
3. Weigh healthcare and other senior costs: Evaluate how healthcare expenses and other costs associated with aging may influence the decision.
4. Assess tax impact on heirs: Understand how your heirs might be affected by the tax implications of Roth conversion.
5. Model multi-year scenarios: Project the outcomes of different scenarios over multiple years to make an informed decision.

Strategically opting for partial Roth conversions tailored to your specific situation could provide optimal tax advantages, particularly for those with substantial IRA balances.

It’s crucial to be aware of a significant limitation — Roth conversions cannot be reversed. If tax rates decrease in the future or if the converted funds are needed earlier than expected, locking in taxes at a higher rate could lead to regret. Additionally, changes in inheritance plans may occur, emphasizing the importance of conducting a thorough multi-year analysis before committing to a conversion strategy.

Before making decisions regarding Roth conversion, it’s advisable to either run your own scenarios or seek the assistance of an investment advisor portfolio manager to perform these critical calculations. Assessing the potential outcomes and navigating the complexities of tax planning, future income considerations, and other factors requires a comprehensive understanding of your unique financial situation.

In The End…

When you reach 65 or any age for that matter, when certain aspects of your retirement finances are still uncertain, opting for small, gradual Roth conversions spread over several years provides flexibility. This approach allows you to balance the immediate tax costs with potential future tax savings for both yourself and your heirs. Just like with other financial decisions in retirement, the key is to prudently evaluate your multi-year tax outlook before making any moves. This careful assessment ensures that your financial strategy aligns with your overall goals and minimizes any unexpected tax burdens.

Retirement Planning Tips

It’s important to be aware of income limitations for contributing to a Roth IRA. In 2024, the IRS restricts single filers with an adjusted gross income (AGI) exceeding $87,000 and married couples filing jointly with an AGI exceeding $240,000. However, high earners can explore the option of backdoor Roth IRAs to legally navigate around these income limits.

Rather than relying on guesswork to determine if converting your IRA makes sense, consider consulting an investment advisor portfolio manager who can analyze the numbers for you. Finding the right investment advisor portfolio manager doesn’t have to be a challenge.

Studies Support Advisor Relationships!

Did you know that navigating the uncertainties of the markets and your finances is generally smoother with the support of an investment advisor or portfolio manager? Studies consistently reveal that individuals who work with investment advisors and portfolio managers tend to have up to three times higher net worth on average, but that’s not all, there’s a significant impact on overall well-being, with those who seek professional advice exhibiting higher levels of happiness and lower anxiety. Having a guiding hand through the financial landscape proves beneficial not only in terms of monetary outcomes but also in fostering a sense of security and contentment, making the challenges of an uncertain year more manageable with professional assistance.

Look No Further, I am A Fiduciary..

However, unraveling the mystery of locating a trustworthy fiduciary advisor proves to be a perplexing task for many. A quick look at common Google searches related to the topic unveils a sense of urgency and a quest for guidance. Phrases like “Fiduciary financial advisors near me,” “Best fiduciary financial advisor,” and “Financial investment advisors near me” are entered into search engines hundreds of times daily, showcasing the widespread need for assistance in finding reliable fiduciary guidance.

Have Questions? Contact us!

We’ve assisted our clients through every stage of life. Even when you’re not aware that something might impact your financial future, it likely will to some extent. Engaging in a conversation with your investment advisor about any financial changes is an excellent approach to keeping your financial goals in focus.

We have expertise in cross-border wealth management. Don’t hesitate to reach out to us — we’re committed to providing tailored solutions for your cross-border financial needs.

For more information or to connect with me, you can reach out via email at [email protected] or get to know me better by exploring my engaging video content on YouTube https://www.youtube.com/@joemacek.

I share valuable insights and discussions on financial planning, market commentary, and investing concepts that can further enrich your understanding. Join me on my channel to discover more!

Don’t hesitate to reach out today at 1–888–324–4259 to discover more about how we can help you achieve your investment milestones.

Joe A. Macek, FMA, CIM, DMS, FCSI

Investment Advisor, Portfolio Manager

iA Private Wealth | iA Private Wealth USA

Toll Free North America: 1–888–324–4259

Email: [email protected]

238 Portage Ave, 3rd Floor

Winnipeg, Manitoba R3C 0B1

26 Wellington Street East, Suite 700

Toronto, Ontario M5E 1S2

iA Private Wealth is a member of IIROC and the Canadian Investor Protection Fund. iA Private Wealth (USA) Inc. is a registered investment adviser with the SEC. This platform is solely for informational purposes. Investing involves risk and possible loss of principal capital. Comments by viewers or third-party rankings and recognitions are no guarantee of future investment outcomes and do not ensure that a viewer will experience a higher level of performance or results. Public comments posted on this site are not selected, amended, deleted, or sorted in any way. If applicable, certain editing of personal identifiable information and misinformation may be deleted. Adviser believes that the content provided by third parties and/or linked content is reasonably reliable and does not contain untrue statements of material fact, or misleading information. This content may be dated. Please visit the following page for further disclosures related to iA Private Wealth (USA) Inc.: www.iaprivatewealthusa.com