For Retirees in Their 60s, the Move That Adds Years to a Nest Egg

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Tyler Anderson, CFP®

President
Mint Hill Wealth Management
Office : 833-421-1140

Boomers moved billions from retirement savings into tax-free accounts this year. The strategy can make your nest egg last longer in retirement. 

President-elect Donald Trump’s pledge to extend his 2017 tax cuts makes it attractive for longer.

The move is called a Roth conversion. In traditional 401(k)s and individual retirement accounts, income taxes are deferred until the money is withdrawn. Conversions require paying the tax bill now, after which the money can grow tax-free, shielded from future tax increases.


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Those who convert portions of their balance if they fall into lower brackets in the early years of retirement may generate enough tax savings to make their portfolios last up to seven years longer, said William Reichenstein, a professor emeritus at Baylor University and head of a service at T. Rowe Price that helps individuals create retirement plans with tax-efficient withdrawal strategies.

Now that the tax cuts are likely to be extended beyond 2025, retirees have more years to spread out conversions without pushing into higher tax brackets.

“We had been telling clients they only have this year and next to convert to a Roth while tax rates are on sale,” said Ed Slott, an IRA consultant in Rockville Centre, N.Y. 

At Fidelity Investments, Roth conversions by individuals grew 45% during the 12 months ended in July.

Among people in their 60s, Roth conversions have risen sharply since 2017, when the tax cuts made it cheaper to do them. About 300,000 in that age range converted over $14 billion to Roth accounts in 2020, the latest year for which Internal Revenue Service data is available. That’s up from 137,000 who converted $4.4 billion in 2017.

“Now it looks like we’ll have more years of low rates to take advantage of Roth conversions,” Slott said.

When Roth conversions pay

People in their 60s have reasons to consider Roth conversions now even beyond the extension of the tax cuts. Taxable income tends to increase for many retirees at age 73, when those born between 1951 and 1959 are required to take withdrawals from traditional retirement accounts and pay taxes at ordinary income rates on that money.

Combined with Social Security and other income, that can push a taxpayer into a higher tax bracket, raise their Medicare premiums or trigger the 3.8% net investment-income surtax. The age to start required withdrawals rises to 75 in 2033, giving those born in 1960 or later even more time for Roth conversions. Once RMDs begin, Roth conversions often make less sense, although some can benefit.

By shifting money into Roths, retirement savers can shrink their traditional accounts. That reduces their future required distributions and the taxes they create.

Those with Roths can also take tax-free withdrawals to supplement their taxable income and stay within a lower tax bracket. And because Roth owners don’t have to take required distributions, they can leave more inside those accounts for heirs.

House Republicans say they intend to move a bill in the first 100 days of the new Congress, which starts in January. It is likely to include tax cuts, though the particulars have yet to be hashed out.

Slott said December is the time to analyze 2024 income from investment accounts and other sources to see how much you can convert without jumping to a higher tax bracket.

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Conversions on the road to retirement

Bill and Sue Walsh, both 57, are in a 32% federal income tax bracket this year. The Naperville, Ill., couple will be fully retired next year, when they plan to cover their expenses by selling brokerage account investments at a capital-gains tax rate of up to 15%. 

To take advantage of their lower bracket in 2025, they plan to convert $200,000 from their traditional IRA to a Roth. Bill figures that will leave them in a 22% tax bracket, which for married couples goes up to $206,700.

Making the conversion more attractive is the state of Illinois, which doesn’t tax IRA income, he said.

The couple currently has about 12% of their retirement savings in Roth accounts and would like to have 20% in them before taking Social Security at age 70. They plan to use their Roth money to supplement their taxable income in years in which taking more from a traditional IRA would push them into a higher tax bracket.

Bill said they would pay the tax on their Roth conversion with money from the brokerage account. That way, they can move the entire $200,000 they will withdraw from the traditional IRA into the Roth, rather than using a portion of it to cover the tax bill.

Roth risks

Bill Simonis, 68, has been doing Roth conversions since retiring in 2020 as chief financial officer of a soft drink company.

He and his wife, Mary Simonis, 69, a retired school fundraising coordinator, are taking Social Security and have rental income. But they have been able to convert close to $150,000 a year over the past few years while still remaining in the 24% bracket. 

If Congress extends the 2017 tax cuts, the Oconomowoc, Wis., resident said he’ll consider doing more annual conversions. He’s worried taxes could eventually move higher, because of the nation’s finances.

Roth conversions have had a downside for the couple, who are paying Medicare premium surcharges, which are tied to income. But Simonis figures it is worth it to pay the surcharges for a few years to move more money into a tax-free account. He’s especially eager to stockpile Roth savings for the surviving spouse, since single filers get hit with higher tax rates at lower income levels.

Write to Anne Tergesen at anne.tergesen@wsj.com

Tyler Anderson profile photo

Tyler Anderson, CFP®

President
Mint Hill Wealth Management
Office : 833-421-1140