$5M Roth Conversion in Late 60s

Roth Conversions can be a great idea! As you are in your late 60s, you may only have a couple of years to convert before you have to start taking Required Minimum Distributions (RMDs). These RMDs will likely put you up into a high enough tax bracket that you would generally not want to do further Roth conversions once they begin. As there are several factors involved in the analysis, I would recommend you get a financial advisor that can run tax planning projections in order to help you decide what to do. However, we can look at some general numbers (all numbers assume you are Married Filing Jointly). If you have no other income, then you can convert up to your standard deduction (~$33k) + the top of the tax bracket to which you want to pay taxes. Let’s suppose you want to pay up to the 24% bracket. So that amount would be ~$390k + $33k, coming to a total conversion of ~$423k. Again, this is assuming you have no other income, dividends, interest of any kind. If you have those, you’ll need to reduce your conversion by those other income amounts. You can convert up to the top of whatever tax bracket you want, with amounts above $731k being taxed at 37%.

Two other concerns to be aware of. First, by converting such a sum, you will be hit with an IRMAA (Medicare) surcharge. So the following year after you file, you will be required to pay more (the above example put you in the +$352/mo. bracket). This is an additional cost you cannot avoid while converting on Medicare. Second, you will owe a large tax payment when you go to file. Ideally this should be paid, not from money withheld from the conversion, but using outside cash or taxable money. While you can have the tax amount withheld from the conversion, if you pay from outside funds, it results in a larger amount converted into your Roth IRA, which is now tax-free. Be sure to pay this to the IRS before you file, ideally by Jan 15 of the year following the conversion as the IRS will then see it as a quarterly estimated tax payment made before you filed your taxes. This avoids the IRS charging of penalties for underpayment.

As you can see, there are quite a few moving pieces in the analysis and the practical parts of the conversion process. While you can perform these yourself, I would recommend an experienced advisor to assist. Feel free to reach out to me if you’d like to discuss.