Should I Convert 25% of My 401(k) Over 4 Years to Reduce RMDs and Taxes Before Retirement?

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Transferring some of your retirement savings from a tax-deferred account like a 401(k) to a Roth IRA can help you reduce or possibly avoid required minimum distributions (RMDs) and income taxes later on. It can also be beneficial if you want to leave tax-free savings to your heirs. A Roth conversion can therefore provide you with some flexibility when tax planning your finances in retirement.However, you can't escape paying income taxes on your tax-deferred savings entirely, and converting 25% of a large 401(k) could lead to a sizable tax bill you'll have to pay right now. You may want to consider a conversion strategy based on keeping you from entering a higher marginal income tax bracket rather than converting a set percentage, although other timing factors may come into play.Here are some factors to think about. You can also get matched with a financial advisor for free if you need help developing a 401(k) conversion plan that will balance present and future tax consequences.Because Roth accounts are not subject to the required minimum distribution (RMD) rules that apply to 401(k) accounts, a retirement saver may want to consider converting funds from a 401(k) to a Roth IRA. Under RMD rules, funds left in a 401(k) or similar tax-deferred account have to be withdrawn on a strict schedule starting at age 73 or 75, depending on your birth year.Unlike Roth withdrawals, which are usually tax-free, 401(k) withdrawals are treated as taxable income. As a result, taxable RMDs can force a retiree into a higher income tax bracket and potentially pose a financial hardship in your golden years when you may be on a fixed income. By reducing or eliminating the need to take mandatory RMDs, a saver can look forward to the likelihood of paying fewer income taxes in retirement and having more to spend on lifestyle expenses.The challenge of Roth conversion is that amounts transferred from a tax-deferred account to a Roth IRA are considered taxable income. In the case of a sizable conversion, this can bump a saver into a higher marginal income tax bracket and lead to a large tax bill that is due when filing the current year's return.For example, if your 401(k) is worth $1 million and you convert 25% in one year, or $250,000, that would add $250,000 in taxable income to your current income. If you are a single filer with no other income, this would put you in the 32% marginal tax bracket and lead to a tax bill of approximately $53,014, using the rates in effect for the 2024 tax year.Terms and Privacy PolicyPrivacy & Cookie SettingsMore InfoTrending tickersAMD Advanced Micro Devices, Inc. 273.99 +15.87 (+6.15%)MYSE Myseum, Inc. 3.6050 +2.1650 (+150.35%)BTC-USD Bitcoin USD 75,000.35 +585.95 (+0.79%)NVTS Navitas Semiconductor Corporation 12.25 +1.99 (+19.36%)HIMS Hims & Hers Health, Inc. 27.26 +2.96 (+12.21%)PortfolioSign in to access your portfolioSign inTop gainersXNDU Xanadu Quantum Technologies Limited 35.22 +10.04 (+39.87%)AXTI AXT, Inc. 78.55 +15.62 (+24.82%)NN NextNav Inc. 20.76 +3.79 (+22.33%)NVTS Navitas Semiconductor Corporation 12.22 +1.96 (+19.10%)FLY Firefly Aerospace Inc. 43.47 +5.85 (+15.54%)Top losersMANE Veradermics, Incorporated 72.96 -7.54 (-9.37%)BETA BETA Technologies, Inc. 16.77 -1.50 (-8.20%)IESC IES Holdings, Inc. 488.38 -40.84 (-7.72%)IBRX ImmunityBio, Inc. 7.19 -0.59 (-7.59%)LCID Lucid Group, Inc. 7.59 -0.62 (-7.55%)Most activeNVDA NVIDIA Corporation 198.10 -0.77 (-0.39%)INTC Intel Corporation 67.82 +2.88 (+4.43%)QBTS D-Wave Quantum Inc. 21.84 +1.03 (+4.95%)IONQ IonQ, Inc. 44.79 +1.53 (+3.55%)HIMS Hims & Hers Health, Inc. 27.42 +3.12 (+12.87%)Top economic eventsEarnings eventsMy earnings eventsEarnings events