Should I consider a Roth conversion?

Q. - Retiring soon. Should I still consider a Roth conversion?

A. - You’ll find a lot of advice to convert some or all of your 401(k) into a Roth to pay less tax in retirement and leave what’s left to beneficiaries tax-free. For many with even moderately sized 401(k) accounts, the benefits can outweigh the cost of conversion by paying taxes now. But there are others - with even moderately sized 401(k)s - who may either pay more in taxes by converting or put themselves in a worse financial position by doing the conversion. It's not an easy question to answer.

First, let’s review what happens to a 401(k) after retirement (assume after age 59½, as that’s when most can begin penalty-free withdrawals). The account value will continue to grow based on how it is invested, but there are no more contributions, which were also increasing its value. If money is needed after retirement as a regular monthly income or from time to time, the account value may begin to drop each year as withdrawals are made. The money distributed is taxed as income, thus added to your other income, including Social Security, which determines how much tax you’ll pay. The advice in support of Roth conversions is for another reason: to reduce the amount subject to the Required Minimum Distribution (RMD), which increases your taxable income every year after age 73 because you are forced to distribute an increasing amount and pay higher income tax on income you may not need to live on. You can see the impact of increasing RMDs by using an RMD calculator (available to purchase here or another online version) and estimating the tax due.

The key question - will your income be low enough, even with the RMD, to pay zero or minimal income tax, even when adding the taxable 401(k) distributions? Consider this scenario. A couple has a combined Social Security annual income of $58,000 and needs only $15,000 annually from their 401(k)s, which are worth $500,000 at retirement. The $15,000 is less than the investment return on the 401(k), so the 401(k) will continue to grow. When they reach age 73, they must start their RMDs. At that time, even after taking out the $15,000, the account will have grown to $705,196. Their first RMD will be $28,667, which is about twice what they need to live on.

So, what is the tax impact on this couple now that RMDs have started? Maybe zero or a few hundred dollars. Why? Because when calculating the tax due on Social Security, in this case, only 30% of their Social Security counts as taxable income. Add that to the $28,667 from the 401(k), plus the higher standard deduction for seniors in 2026, and their Adjusted Gross Income is $46,283, resulting in $0 tax due for this couple. [Note: When the $12,000 additional senior deduction expires in 2028, the tax would be about $1,000.  Also, I did not inflate their Social Security or tax brackets, so the answer is an estimate.]

However, every year after age 73, the RMD increases, and the couple’s tax bill may go up. However, they also have the option to give a portion of their RMD to charity (a Qualified Charitable Distribution or QCD) to lower the tax due. In the same scenario, at age 82, when their RMD is $45,000, they’ll give $30,000 to a charity as a QCD and keep $15,000 as income. Thus, they’ll pay almost zero in tax even though their RMD is increasing. That result might be preferable to paying the tax to convert that $500,000 401(k) before age 73.

If they pay the equivalent of 20% in taxes to convert the 401(k) over several years, that either lowers the retirement account’s value by paying the tax from the amount converted, or they’ll have to find the $100,000 to pay the taxman from other savings. Either way, they’ll have $100,000 less. Giving Uncle Sam a good chunk of money before or early in retirement to do Roth conversions means there’s less retirement savings for unplanned expenses. One could have very high health care expenses, and the couple might need even more than the RMD amount, for example $50,000, to withdraw to pay the health care bills. However, even though the 401(k) is taxable income, the medical deduction on their tax form might reduce their tax bill to $2,500. Even if this happens for multiple years, the total tax paid might be far less than the $100,000 spent to convert to a tax-free Roth.

If you do decide to convert, keep in mind the total tax impact. Convert too much in a year, and that can bump you up to a higher tax bracket, and if on Medicare, the dreaded Income Related Monthly Adjustment Amount (IRMAA) or a monthly fee when income is too high. And don't forget state taxes. If you spread out the conversion over many years, you have to remember to do the conversion every year and figure out how you'll pay the additional tax resulting from the conversion.

Of course, there are other considerations, such as: (a) whether to pass a tax bill on to your retirement account beneficiaries, (b) avoiding an increase in tax paid due to the growth of the 401(k) over the retirement years, and (c) protecting yourself from tax risk - rising tax rates in the future. This makes the decision to convert difficult to calculate, in my opinion, especially since you're guessing what may or may not happen decades into the future. In summary, don’t assume it’s always better to convert to a Roth. When your RMD is small or even moderately sized, your tax impact can be much less than the cost of converting, so just stick with the tax-deferred 401(k) or Rollover IRA and manage your tax impact as needed.