I’m 62 With $900,000 in My 401(k). Should I Convert $90k per Year to Avoid Taxes and RMDs in Retirement?

Late-in-life Roth conversions can take some tricky math.

As you approach retirement, one of the most important questions will be how to manage the taxes on your retirement income. For households that rely on pre-tax portfolios, like a 401(k) or a traditional IRA, this means anticipating ordinary income taxes on all of your withdrawals. It also means anticipating the necessary withdrawals associated with the IRS’ Required Minimum Distributions (RMD) rule.

As a result, it’s common for people in their 60s to at least consider converting their money to a Roth IRA. This can have significant upsides. It will eliminate your taxes in retirement, along with your RMD requirements, and will even improve the after-tax value of your estate.

The problem is that, as you close in on retirement, a Roth conversion can get very expensive. You will pay quite a lot of up-front conversion taxes in exchange for those long-term income tax savings. Let’s say that you’re 62 with $900,000 in your 401(k). In this case, will you save money by converting your portfolio to a Roth IRA $90,000 per year? Here are some things to think about. 

A financial advisor can provide personalized guidance for Roth conversion and other retirement strategies.

RMD and Pre-Tax Portfolio Taxes

Every pre-tax retirement portfolio, including 401(k)s and traditional IRAs, have two major issues that households should keep an eye on. 

First, these portfolios are taxed as ordinary income when you take withdrawals in retirement. This means that you pay taxes at income tax rates, instead of the special lower rate ordinarily reserved for investments and capital gains. These taxes apply to your entire withdrawal, not just the portfolio’s gains, as your original contributions were tax deferred. 

Second, all pre-tax portfolios have what are called Required Minimum Distributions (RMDs). This is a minimum amount that you must withdraw from each pre-tax retirement account that you hold. Currently, required minimum distributions begin at age 73, meaning that you must begin taking these minimum withdrawals in the year that you turn 73. The exact amount you must withdraw is based on a combination of your portfolio’s value and your age.

Make sure you’re taking the right amount by starting your own RMD calculation:

Required minimum distributions are a form of tax planning by the government. This is an IRS rule intended to make sure you begin triggering tax events on your pre-tax portfolios so it can collect planned revenues, and the penalty for not taking your full RMD is assessed on your taxes. 

Because these withdrawals are fully taxable, RMDs can significantly affect your overall tax situation in retirement. Large distributions may push you into a higher income tax bracket, increase the portion of your Social Security benefits that are taxable, or even trigger Medicare premium surcharges (known as IRMAA).

For many retirees, this means that tax management isn’t just about following the rules, it’s about strategically timing withdrawals and balancing income sources to avoid unnecessary tax consequences.

Roth Conversions and Retirement Taxes

The easiest way to avoid both taxes and RMDs is through a Roth IRA. 

Post-tax portfolios do not have required minimum distributions. This is because you do not pay any taxes on the money you withdraw from these accounts.

To take advantage of this, many households consider what is called a Roth conversion. This is when you transfer money from a qualifying pre-tax portfolio, such as a 401(k) or an IRA, to a post-tax Roth IRA. You can convert any amount of money you want, so long as it comes from a valid pre-tax account. Once the money has been moved to a Roth IRA, it will grow tax-free and you will have neither income tax nor RMD requirements in the future.

The catch to a Roth conversion is that you do have to pay up-front conversion taxes. When you convert money to a Roth portfolio, you include the entire amount converted as taxable income for the year in question. This increases your taxes for the year proportionally.

For example, let’s say you’re an individual making $75,000 per year. Ordinarily, you would owe around $14,079 in annual income taxes. However, say that this year you convert your $900,000 401(k) to a Roth IRA. This would bring your taxable income to $975,000 for the year, and you would owe total income taxes of $345,100 

If you are older than 59 ½ you can withdraw money from your portfolio to pay these taxes. Here, for example, your Roth conversion could raise your taxes by an estimated $331,021 for the year. If you take that from your portfolio, you would have $568,979 left in your Roth IRA after taxes. If you are not older than 59 ½, or if you’d like to leave your money in place, you will need to have another source of funds to pay these taxes.

A financial advisor can help you navigate Roth conversion rules and calculations based on your own circumstances and assumptions. 

Staggered Roth Conversions

As we illustrate above, conversion taxes can be a huge drawback to a Roth conversion. 

Specifically, the closer you are to retirement, often the more likely it is that the costs of conversion taxes will outweigh your future tax savings. You are likely to be in a higher tax bracket late in your career, you will transfer more money if you are nearing retirement, and your Roth IRA will have less time for tax-free growth. 

One way to help manage that is through what’s called a staggered conversion. This is when you convert smaller amounts of money in stages, rather than a large amount of money all at once. 

The key advantage to a staggered conversion is that it can help keep your tax brackets low. The more money you convert, the higher your taxable income and the higher your resulting tax brackets. This means you will pay higher taxes per dollar converted than you would by converting less at a time. By converting your money in smaller, staggered amounts, you can keep your tax brackets lower. 

Take our example here. If you convert all $900,000 at once you will push your taxable income to the 37% bracket, with an effective tax rate of 32.02% overall (setting aside your ordinary income for the year). On the other hand, if you convert just $90,000, that would only fall into the 22% tax bracket and a 13.40% effective rate. 

Again, setting aside your income, each $90,000 conversion would trigger $12,061 of income taxes. This would come to $120,610 over 10 years, less than half the $307,197 in conversion taxes you would pay by making this move all at once.

Should You Make a Roth Conversion?

So, should you convert your money? It depends on your goals. If you are approaching retirement, you might spend more money on conversion taxes than you will save on income taxes and RMD requirements. If you are looking to maximize the value of your estate, however, you will usually preserve the most wealth for your heirs by allowing them to inherit a tax-free Roth IRA.

To understand that, let’s look at your $900,000 401(k). For ease of use, we will assume away both inflation and portfolio growth, although in real life neither are trivial concerns.

Let’s assume that your income is the rough median of $75,000 per year. If you convert $90,000 per year, this would push your annual taxable income to $165,000. Your tax bracket would tick slightly up from 22% to 24%, and you would pay conversion taxes of approximately $20,915 per year ($29,676 total taxes – $8,761 of income taxes at $75,000 of income). 

Over 10 years, this would come to a total of $209,150 in conversion taxes, leaving you with $690,850 in a Roth IRA at age 72.

Let’s further assume that you use a standard 4% withdrawal strategy, meaning you take 4% from this portfolio each year for 25 years. With our post-conversion Roth IRA this would give you approximately $27,634 of after-tax income each year ($690,850 * 0.04). With your traditional IRA, you would have an estimated $33,652 of after-tax income each year ($900,000 * 0.04 = $36,000 – $2,438 of taxes). 

So in this case you might have more income by leaving your money in place, and that’s before we even account for lost growth and opportunity cost due to the conversion taxes. However, these examples are simplified and don’t account for some dynamics like portfolio growth, inflation, and your own income level and retirement needs.

There are many ways to look at it, but in most cases the result is the same. By the time you reach your 60s, your retirement accounts have grown large enough to trigger very significant conversion taxes. At the same time, a new Roth portfolio will have little (if any) time to enjoy untaxed growth that would offset those taxes. The upshot is that it’s rare to save money on taxes by making a late-career conversion, but it can be a great boon for the right individuals.

How to Decide if a Roth Conversion Makes Sense for You

Before converting your 401(k) or IRA to a Roth account, it’s worth stepping back to evaluate whether this strategy fits your overall financial picture. A Roth conversion can reduce future tax burdens and eliminate required minimum distributions, but the timing and long-term math must work in your favor. Here are a few key factors to consider:

1. Your current and future tax brackets. If you expect your income tax rate to fall in retirement, a Roth conversion could increase your total lifetime taxes rather than reduce them. Conversely, if you anticipate higher tax rates later, either due to personal income growth, legislative changes, or RMDs pushing you into a higher bracket, a conversion might make sense now while rates are lower.
2. Your retirement timeline. How close you are to retirement plays a big role. Conversions made earlier, such as in your 50s or early 60s, give the Roth IRA more years to grow tax-free. If you’re already retired or plan to withdraw soon, the shorter time horizon may not justify the up-front tax hit.
3. Available funds to pay conversion taxes. Ideally, conversion taxes should be paid with cash from outside your retirement account. Using portfolio funds to pay the bill can shrink your principal and reduce the benefits of compounding. If you don’t have non-retirement assets available for taxes, you may want to convert smaller amounts or reconsider altogether.
4. Estate planning goals. Roth IRAs can be powerful tools for leaving wealth to heirs. Beneficiaries can withdraw funds tax-free (subject to the 10-year distribution rule), which can significantly increase the after-tax value of your estate. If building a legacy is a high priority, that advantage may outweigh short-term conversion costs.
5. The impact of RMDs on your taxable income. RMDs can inflate your taxable income in retirement and affect everything from your tax bracket to your Medicare premiums. Modeling your future RMDs can reveal whether they’re likely to create tax complications later, and whether gradual Roth conversions could smooth your income and tax obligations over time.

When you take these factors together, the “right” decision depends less on the size of your nest egg and more on your personal circumstances, your income, goals, and how long your money will stay invested.

Bottom Line

A Roth IRA can certainly help you manage your taxes and RMD withdrawals in retirement, by eliminating them altogether. However, as you approach retirement, make sure that your long-term savings will actually exceed your up-front conversion taxes, otherwise you might pay a hefty premium for that ease of mind. A financial advisor can model different conversion timelines and help you determine whether the benefits outweigh the tax cost in your specific case.

More Tips

• A financial advisor can help you build a comprehensive retirement plan. 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.
• Roth IRAs are a fantastic financial vehicle, but they’re particularly useful if you time them well. Perhaps more than any other retirement account, these will be most valuable to you early in life, when you can maximize the tax advantages. 
• Keep an emergency fund on hand in case you run into unexpected expenses. An emergency fund should be liquid — in an account that isn’t at risk of significant fluctuation like the stock market. The tradeoff is that the value of liquid cash can be eroded by inflation. But a high-interest account allows you to earn compound interest. Compare savings accounts from these banks.
• Are you a financial advisor looking to grow your business? SmartAsset AMP helps advisors connect with leads and offers marketing automation solutions so you can spend more time making conversions. Learn more about SmartAsset AMP.

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