I’m 62 With $1 Million in a 401(k). Should I Convert $100,000 Per Year to a Roth IRA to Avoid RMDs?

Retirees with significant assets often have to plan around required minimum distributions (RMDs). If you already have sufficient income and don’t need the money in a pre-tax portfolio, annual RMDs can cost you significantly in otherwise unnecessary taxes. 

If you have $1 million in a 401(k), for example, the IRS could require you to withdraw tens of thousands of dollars from this account each year, taxing all of it. For households that don’t need that money yet, this can lead to an unnecessarily high tax bill. 

Moving your money into a Roth IRA can help you save on those taxes in retirement, since this money has already been taxed and isn’t subject to RMDs. However, making that transfer will raise your taxes considerably upfront, so it’s important to ensure this won’t actually cost you more money in the long run.

A financial advisor can help you plan for RMDs and make other important decisions surrounding retirement. Find a fiduciary advisor today.

What Are RMDs?

Required minimum distributions(RMDs) are a feature of pre-tax retirement accounts, including 401(k)s and traditional IRAs. 

Beginning at age 73, individuals who hold a pre-tax retirement account must begin withdrawing a minimum amount each year. This rule applies on a per-account basis. For example, if an individual owns both a 401(k) and an IRA, they  must take a minimum withdrawal from each account annually. To calculate your RMD, you must use the value of your account and your age. 

If you have multiple IRAs, you must calculate the RMD for each account. However, the IRS lets you withdraw the money from any combination of those accounts. 

RMDs are designed to trigger a tax event. As with all withdrawals from a pre-tax portfolio, RMDs are taxed as ordinary income. The IRS wants individuals to eventually pay taxes on the income saved up in these portfolios, so it requires you to make at least some withdrawals in retirement. For this reason, RMDs do not apply to Roth IRA and Roth 401(k)s. 

RMDs can significantly increase a household’s tax liability. For example, say you are 80 years old with a $500,000 IRA that you don’t currently need to support your lifestyle and spending. The IRS will nevertheless require you to withdraw $24,752 from this account, all of which will count toward your taxable income for the year. Not only will you owe taxes on this money, but you will have to choose between selling the assets (and sacrificing future growth) or raising the tax money from another source. 

A financial advisor can help you calculate how RMDs will impact your tax situation and how best to handle them.

Managing RMDs With Roth Conversions

Roth IRAs are not subject to RMD rules, so converting a pre-tax account to a Roth portfolio is generally the easiest way to avoid minimum distributions. 

For example, say that you are 62 with  $1 million in your 401(k). Disregarding contributions and withdrawals and using an 8% annual growth rate, this portfolio could be worth over $2.33 million by age 73. 

The IRS would require you to withdraw approximately $88,000 from that account that year. This puts you near the top of the 22% tax bracket even before accounting for any Social Security income and other retirement portfolios. 

If you held this money in a Roth portfolio, on the other hand, you would be able to leave it in place until you needed it. You could set it aside for later in life, allowing continued growth without withdrawals or taxes.

The primary issue with a Roth conversion is that, in exchange for tax savings later, you must pay income taxes now. Any money that you convert into a Roth IRA must be included in that year’s taxable income. 

Estimate your RMDs to understand how much of your savings you’ll need to draw down in retirement.

So, for example, say that you earned $100,000 in 2025 and converted $1 million from your 401(k) to a Roth IRA in the same year. Your taxable income for 2025 would be $1.1 million. Assuming you take the standard deduction, this comes to nearly $358,200 in federal income taxes.

To manage this, you can do a staggered or gradual conversion. Instead of rolling over your entire portfolio, you can transition a portion of it at a time. This helps ensure you never trigger a larger tax bill than you can handle each year and you don’t catapult into a higher tax bracket. 

If you are over 59 ½ years old, you can also cash out a portion of your account to raise money for those taxes. However, this will reduce your retirement savings. 

For example, say that you make $100,000 per year and have $1 million in your 401(k) at age 62. If you convert $100,000 per year, you will increase your taxable income to $200,000 per year, paying approximately $37,000 in federal income taxes. By age 73, you will still likely have a considerable amount in your 401(k), as account growth would partially offset your conversions. However, you will have the $1 million in an account free of both taxes and RMD requirements. 

For more personalized help estimating your tax liability and the impact of RMDs, speak with a financial advisor.

Before You Do a Roth Conversion

Before performing a Roth conversion, beware of two issues. 

First, Roth contributions have a five-year rule if you’re under 59 ½, which means you cannot withdraw these funds for five years. This rule applies separately to each conversion. Therefore, if you make a series of staggered conversions with one each year, you will have to wait five years after the first conversion to withdraw that money, another five years to withdraw money from your second conversion and so on. Violating this rule will trigger taxes and a 10% penalty.

Second, these taxes can quickly add up. Each year, you will pay income taxes on the money that you convert to your Roth IRA. Depending on your tax bracket when you make these conversions, your upfront taxes could very well be higher than the income taxes you would pay on minimum distributions in retirement. 

Bottom Line

Staggered conversions from a 401(k) to a Roth IRA can either reduce or eliminate the need for required minimum distributions (RMDs) while also saving you money on each year’s tax bill. However, if you are already nearing retirement, it is important to ensure that up-front taxes won’t cost you more than the distribution taxes you would incur in retirement.

Tips for Managing RMDs

• The IRS only requires you to take required minimum distributions by the end of each year. When and how you take these withdrawals is up to you, so make sure you structure these distributions to your maximum benefit.
• A financial advisor can help you build a comprehensive retirement plan that accounts for your RMDs and their tax impact. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

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