Questions on how age affects the decision to convert to a Roth IRA are common. What age is too old to convert? There are no age limits to convert. There is also no magic age when conversion makes the most sense or no longer makes sense. Conversion can be the right move at any age.
Younger Savers
Roth IRA conversions for younger people are usually a smart strategy. It is no surprise. Younger people are generally in a lower tax bracket and have not yet accumulated large sums in their IRAs or 401(k)s. Also, time is on their side. They have a long timeline to save and accrue tax-free earnings in a Roth IRA.
Conversion comes with a tax bill. Younger people who may not have time to amass a large amount of savings should prepare for the tax cost. Now that recharacterization is no longer available, there is no way to undo a conversion to escape the tax hit.
Midlife Conversions
For those looking to convert in middle age, timing is critical. These individuals are likely to be in their peak earnings years and have the highest tax brackets. The best time to consider a conversion is in a year when tax conditions are optimal and can occur at a low tax rate or no tax cost with offsetting tax losses, deductions, or credits.
A tax year with a low tax bracket or net operating losses from a business is a good year for middle-aged savers to consider conversion. Another strategy to examine is doing a series of smaller annual Roth conversions over several years to lessen the tax impact each year.
Too Old to Convert? There are no age limits to convert.
The age when an individual is too old to convert does not exist. Senior individuals may think they do not have a long time to save, which overlooks the potential of conversion as an estate planning strategy.
For older individuals who do not need their retirement savings soon or at all, especially if they plan to pass these funds on to beneficiaries – the Roth conversion is an effective estate planning vehicle, and even more so now after the elimination of the stretch IRA under the SECURE Act. Most beneficiaries will be subject to the 10-year rule, which pushes the tax bill into a shorter time frame, leaving less for inheritors. Roth conversions can eliminate the tax bill for heirs since the tax will be paid upfront at conversion, possibly at lower tax rates.
Older individuals should also be advised that a Roth conversion does increase ordinary income for the year of the conversion. This potentially causes the loss of valuable tax credits and deductions, taxation of Social Security, and increased premiums for Medicare Part B and Part D premiums. However, that additional income is only for one year, and the tradeoff is future tax-free earnings and tax-free distributions from the Roth IRA.
By Sarah Brenner, JD
Director of Retirement Education
