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You can perform a Roth conversion at any age, and potentially boost your retirement income. However, this strategy often produces more positive results the sooner it’s done. One reason is that you have to pay taxes on converted funds at the time of the conversion. After all, money sent to the IRS can’t be invested and grown. Roth conversions may make the most sense if you expect to be in a lower tax bracket after retirement, as well as if you plan to leave retirement savings to any heirs as part of your estate plan. Ultimately, whether converting a 401(k) at 62 is your best move depends on your individual circumstances beyond just the amount in it.
A financial advisor can help you assess your options.
If you’re 62 and have $850,000 in a 401(k), before committing to a Roth conversion, you’ll want to consider several factors. Among other things to think about are your current income, when you plan to retire and how much your income will be in retirement.
Let’s say you currently have $100,000 in taxable income, are single and will retire at 66. If you convert the entire 401(k) now, your taxable income for this year will equal $950,000, including $850,000 in converted funds plus $100,000 in other taxable income. This will put you in the 37% marginal income tax bracket, with an income tax bill of approximately $304,284, as calculated by SmartAsset’s Federal Income Tax Calculator.
If you use some of the converted funds to pay taxes, that money won’t be available for tax-free growth for four more years. Of course, you’ll still have $545,176 in your Roth account after deducting tax payments. Four years of 7% annual growth from investing that will produce a balance of $714,615, according to SmartAsset’s Investment Return & Growth Calculator.
Now let’s look at the scenario of not converting. In four years, assuming 7% average annual growth, your $850,000 401(k) balance will have increased to $1,114,177. That’s $399,562 more than you would have after converting.
However, you also have to consider taxes on your income in retirement. Start with Social Security. Assuming you claim at age 66, those benefits are likely to be $40,560 a year, according to SmartAsset’s Social Security Calculator.
Now add 401(k) withdrawals. At the 4% safe withdrawal rate from a $1,114,177 balance, you’ll take out about $44,567 in the first year of retirement. (RMDs won’t be a factor since you’re already withdrawing more than the scheduled RMD amount.)