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A Kiplinger report says people 5–10 years from retirement should not assume a lower income immediately after leaving work will make waiting to convert a traditional 401(k) or IRA cheaper. The decision depends on projected taxable income across retirement, the cost of paying tax now, and effects on a surviving spouse and heirs.
A Kiplinger retirement-planning report says people who are five to 10 years from retirement should not automatically postpone a Roth conversion on the assumption that their income and tax bracket will fall after they stop working. The report recommends comparing the tax cost of converting now with projected taxes over retirement, including required withdrawals, a surviving spouse’s filing status and potential taxes for heirs.
A Roth conversion moves money from a traditional, tax-deferred account into a Roth account. The converted amount is generally included in taxable income for the year of conversion. Future Roth withdrawals may be tax-free if IRS qualified-distribution rules are met. The report stresses that a conversion does not eliminate tax; it changes when some tax is paid and may change how much is owed over time.
The report uses a $2 million pre-tax balance to illustrate why long-term projections can matter. At a hypothetical 6% annual return, it says that balance would grow to roughly $4 million in about 12 years, before accounting for withdrawals or other changes. The calculation is an illustration, not a forecast. Traditional account withdrawals are generally taxed as ordinary income, and required minimum distributions generally begin at age 73 or age 75 for people born in 1960 or later, according to the report.
Potential conversion costs include a higher tax bill in the conversion year, a possible move into a higher tax bracket, and potentially higher Medicare premiums two years later. The report also notes that conversion taxes paid from outside savings use money that could otherwise remain invested, and that a conversion cannot be undone. If a person’s future tax rate is lower, waiting could cost less.
How Future Withdrawals Can Change the Math
The decision matters because a tax bracket in the first year of retirement is only one part of a household’s potential tax burden. A large pre-tax account can produce taxable withdrawals for many years, and those withdrawals may coincide with Social Security, pension income and other sources. The report says higher income can make up to 85% of Social Security benefits taxable and can affect Medicare Part B and Part D premiums through income-related monthly adjustment amounts, or IRMAA. Those premiums generally use tax-return information from two years earlier.
Tax planning can also change when a spouse dies. A surviving spouse generally files as a single taxpayer, whose tax brackets are narrower than those for married couples filing jointly. The report says household income may not fall proportionately, particularly if the survivor inherits retirement accounts. That combination can make future withdrawals more costly than a couple’s current joint tax picture suggests.
Heirs may face a separate timing issue. The report says most non-spouse beneficiaries generally must empty an inherited IRA within 10 years under IRS rules, with withdrawals from traditional accounts generally taxable. For adult children who are still earning, inherited withdrawals could add income during high-earning years. These considerations do not establish that conversion is best; they explain why a household may need to compare more than today’s tax rate with the rate immediately after retirement.
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The Trade-Off Behind Converting Now
Traditional retirement accounts offer a tax deduction or tax deferral on contributions, while the account’s investments grow without annual taxation inside the account. That treatment can be valuable during working years. But the balance is not all spendable after tax: withdrawals are generally taxable, and required distributions can limit how long an owner can defer them.
Roth accounts have a different profile. Qualified withdrawals generally do not add to gross income, and the original owner of a Roth IRA is not required to take distributions during their lifetime. The report says those features can offer flexibility in choosing which accounts to draw from, including during a market decline. Roth savings do not prevent investment losses, and eligibility for tax-free withdrawals depends on IRS rules.
The report’s practical approach is to model income rather than focus only on a projected bracket. It advises separating savings by tax treatment, estimating future required distributions alongside Social Security and pensions, and considering the years after one spouse dies as well as what heirs may receive. It also describes conversions in smaller amounts as an option: a household could convert enough to use available room in a chosen tax bracket, then reassess in years with unusual income such as a bonus or business sale.
““What will my tax rate be the year after I stop working?” is the wrong focus for a household with $2 million or more in pre-tax savings.”
— Kiplinger report
What Individual Projections Must Establish
The report does not provide a personalized calculation or establish whether converting now or later would save money for any particular household. That depends on factors such as account balances, investment returns, spending, pension and Social Security income, filing status, state taxes, conversion size and the source of funds used to pay the tax. The hypothetical 6% return is an assumption, not a guaranteed result.
It is also not yet possible to know exactly what future tax rules, tax brackets or Medicare premium thresholds will apply throughout a reader’s retirement. The report’s discussion of heirs depends on beneficiary circumstances and applicable distribution rules. Readers should treat the examples as planning prompts, not an individualized recommendation.
Model Before Choosing a Conversion Year
The report recommends projecting annual income and withdrawals, then comparing scenarios that include converting in pieces, waiting until retirement, or not converting. Before acting, households can identify how a conversion affects their tax bill, Medicare premiums and state taxes, and decide how they would pay the tax. The report advises coordinating withholding or estimated payments with a tax professional before converting.
For people nearing retirement, the next step is a comparison based on their own accounts and income plans, including scenarios for a surviving spouse and beneficiaries. The report does not set a deadline for conversion or say that every pre-retiree should act now; the decision remains contingent on the household’s projected tax costs.
Key Questions
Should I wait until retirement to convert a traditional IRA to a Roth IRA?
Not automatically. The report says to compare the tax cost of converting now with projected taxable income and withdrawals over retirement. Waiting may be cheaper if your future tax rate is lower, but that outcome should be tested against required distributions and other income.
Does a Roth conversion avoid taxes?
No. The converted amount is generally taxable in the year of conversion. The potential benefit is that qualified future Roth withdrawals may be tax-free under IRS rules.
How can required minimum distributions affect the decision?
Required minimum distributions from traditional accounts generally begin at age 73, or age 75 for people born in 1960 or later, according to the report. Those taxable withdrawals can add to other income, so a projection should include them rather than compare tax brackets alone.
Can a conversion affect Medicare premiums?
It can. A conversion raises income in the year it is made, and the report says that higher income may lead to IRMAA surcharges on Medicare Part B and Part D premiums, which generally use tax-return information from two years earlier. The effect depends on the individual’s income and applicable thresholds.
Can I convert my entire retirement account at once?
The report describes converting in smaller amounts as one possible approach, such as using available room in a chosen tax bracket and reassessing in years with unusually high income. Whether that makes sense depends on personal projections and tax advice; the report does not recommend a single conversion schedule for everyone.
Source: rss
