SmartAsset and Yahoo Finance LLC may earn commission or revenue through links in the content below.
Procedurally, it’s never too late to make a Roth conversion. The IRS allows you to move this money at any time, so long as you have funds in a qualifying pre-tax account.
In many cases, the closer you are to retirement the more likely it is that a Roth conversion could cost you big. This doesn’t mean that it’s a bad idea. In fact, many retirees convert their money to a Roth IRA in order to maximize the value of their estate. However, it does mean that you may pay more in conversion taxes and opportunity cost than you will save in long-term income taxes, depending on your circumstances.
For example, say you’re 63 years old. You have $1.4 million in a 401(k) and have begun taking Social Security. Here’s how to analyze the impact of a Roth conversion. You can also consider using this free tool to match with a financial advisor to discuss your retirement strategy.
A Roth IRA is a form of tax-advantaged retirement account. Specifically, it is what’s called a post-tax account. You fund a Roth IRA with money on which you have already paid income taxes, and you receive no tax benefits for these funds. The account then grows tax-free and, when you withdraw it, you pay no taxes on this money at all.
Particularly if you fund a Roth IRA early in life, this can be an excellent tradeoff. You can pay taxes on the $1 you contribute and avoid taxes entirely on the $10, $20 or $50 you withdraw.
A Roth conversion is when you move money from pre-tax retirement account and put it in a Roth IRA. This is as opposed to a contribution, which is money you deposit in the account from earned and taxed income. A Roth conversion must use funds from a pre-tax portfolio, like a 401(k) or a traditional IRA. There is no limit on how much money you can convert in a given year, unlike with contributions.
The advantage to a Roth conversion is that, once you move this money, you no longer pay taxes on qualifying withdrawals. It can help you set up a tax-free retirement. The disadvantage to a Roth conversion is that you must pay conversion taxes, and those can be considerable.
When you make a Roth conversion, you must pay income taxes on the amount converted in the year that you make the conversion(s). This total amount is added to your taxable income for the year, which then increases your taxes and, potentially, your tax bracket accordingly.
For example, say that you earned $75,000 this year. You also convert $100,000 from your 401(k) to your Roth IRA in the same year. Your taxable income for the year would be $175,000.
It’s essential to plan for this when you make a Roth conversion. You will need extra money to pay these taxes, since that money won’t be automatically withheld from your paycheck. Because you are older than 59.5, you can take this money from the converted funds, withdrawing some money to set aside for taxes and converting the rest. If you are younger, you cannot use the money from your retirement account to pay the conversion taxes and must find it elsewhere.
This makes any Roth conversion a tradeoff. You pay taxes today, which reduces the amount of capital you can invest for long-term growth. In exchange, you will pay no income taxes in retirement, which can save you a lot of money.
The rule of thumb is this: The earlier you are in life and the lower your current tax rates, the better a Roth conversion might work for you. This will give your money more tax-free growth, and you will pay a lower rate in your up-front conversion taxes. The later you are in life and the higher your current tax rates, the worse a Roth conversion might work. You won’t have much time for the tax-free growth that makes a Roth IRA worthwhile, and you will pay more up-front taxes in exchange for less long-term savings.
So, in this case, should you convert your money to a Roth IRA?
Here, you are 63 years old with $1.4 million in a 401(k). You’ve also begun taking Social Security benefits. For ease of use, we’ll assume you began taking benefits last year and receive the minimum amount of 70%. Based on an average Social Security check of $1,900 per month, that would give you about $15,960 per year in benefits income. While this is not nothing, it’s unlikely to significantly change our analysis.
The real issue here is the 401(k). At this stage in your life, converting this portfolio may cost you more in conversion taxes and opportunity cost than you would save in future income taxes, depending on your circumstances.
For example, say that you currently take portfolio income under the 4% rule. This would give you about $56,000 per year of portfolio income, plus your Social Security, for a combined income of $71,960. You will pay a little less than $7,672 in federal income taxes on this income. (It will be somewhat less because only about 85% of your Social Security is likely taxable, but this is accurate enough for our purposes and benefit taxes are beyond the scope of this article.) This gives you an after-tax income of about $64,288.
Of this, you are paying an estimated $4,736 per year in taxes on your portfolio income. Over 25 years this means you will pay, very roughly, $118,400 in income taxes on your 401(k) withdrawals.
On the other hand, say that you convert all $1.4 million of your 401(k) in one year. This would trigger income taxes on the entire amount, and you would pay about $470,784 in conversion taxes. You would pay far more in conversion taxes than you would save in long-term income taxes.
Or, let’s say that make what is called a “staggered conversion.” You move your money in stages, in order to keep your money in lower tax brackets. Say that you convert 10% per year, or $140,000, every year. This would let you finish your Roth conversion just before required minimum distributions kick in in your 70s, helping to keep this simpler.
Setting aside other income, this would trigger an estimated $23,138 in income taxes each year. Over the 10 years you make these conversions, you would pay a total of $231,380 in collected income taxes. This is much less than you would pay with a lump-sum conversion, but it’s still more than you would pay in income taxes from your 401(k). (Remember, this example is simplified and doesn’t account for portfolio growth over the years.)
This is just a snapshot of the issue. Another major problem is the opportunity cost you will incur by reducing your investible capital. The money you spend on conversion taxes is money that will not remain invested for long-term growth, and this is a considerable loss at this stage in life when you have reached the peak of your compounding returns. Under almost any analysis, though, we reach the same conclusion. When you are near- or in retirement, you may spend more on a Roth conversion than you will save on income taxes. Ultimately, you need to weigh this decision as a holistic part of your retirement strategy and financial profile to determine the tradeoffs.
It’s never too late to legally make a Roth conversion, but it can be too late to save money on one. The closer you are to retirement, the more likely it is that a Roth conversion will cost more in conversion taxes than it will save you in the long run.
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 up to three 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.
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.
 and Have Started Social Security. Is It Too Late for a Roth Conversion?){kind=link}
 and Have Started Social Security. Is It Too Late for a Roth Conversion?&description=&image=https://stockknowns.news/wp-content/uploads/2025/01/wp-header-logo-4071.png){kind=link}