ETFs & Funds
Home›ETFs & Funds›Fund Industry›Roth conversions can cut RMDs, but cost more in upfron…
Roth conversions can cut RMDs, but cost more in upfront taxes
At age 73, required minimum distributions start for pre-tax accounts, and a Roth conversion would replace those future mandatory withdrawals with taxes paid earlier.
As households near retirement, managing taxes on withdrawals from pre-tax accounts such as 401(k)s and traditional IRAs becomes a central planning issue, since withdrawals are taxed as ordinary income. In addition, investors must begin taking Required Minimum Distributions, with the rule starting at age 73 for those holding pre-tax retirement accounts, and the amounts depend on account value and age.
SmartAsset and Yahoo Finance explain that Roth IRA conversions are often considered because they can eliminate taxes on qualified retirement withdrawals and also avoid RMD requirements on the converted balance. However, the outlet notes that converting close to retirement can be expensive because savers pay conversion taxes upfront.
Using an example of someone age 62 with $900,000 in a 401(k), the piece frames the question as whether converting $90,000 per year to a Roth IRA would reduce overall taxes versus the costs of paying higher upfront taxes now. It emphasizes that the decision hinges on weighing near-term tax payments against longer-term tax savings and RMD avoidance.
The article also advises speaking with a financial advisor for personalized guidance, given that each household's tax situation and retirement timeline can affect whether a conversion is beneficial.