Converting an IRA to Roth after Age 60: Is it a Smart Move?

Chad Holland |

Converting an IRA to Roth after age 60 is a decision that warrants careful financial planning. In the right situation, a conversion can potentially provide significant tax and estate planning benefits. Learn about this financial strategy's key advantages, drawbacks and details in this article.

Please note: this article is intended to provide general information only. Always consult your tax and estate planning professional for advice and specific recommendations.

What's the Difference Between Traditional and Roth IRAs?

Before discussing conversion, let's define what we're talking about here. The term "IRA" stands for Individual Retirement Account or Individual Retirement Arrangement. These retirement accounts provide a tax-advantaged way to save for the future. 

There are two types of IRAs: traditional and Roth. The traditional IRA allows you to deduct your IRA contributions, reducing your adjusted gross income and current year's taxes. Along with these upfront savings, your account also grows on a tax-deferred basis. 

With a Roth, your tax benefits are not front-loaded. Instead, contributions to a Roth are taxable. The Roth grows tax-free and remains free of any tax when you withdraw in retirement. That assumes you follow the regulations of the account when you contribute to a Roth IRA and later when taking money out. One primary condition is known as the "five year rule". Generally, that requires you to not withdraw earnings within five years of contribution (except for your original contributions, which can be removed at any time).

With both types of IRAs, you can start taking penalty-free withdrawals once you reach age 59 1/2. But in the Roth, you've already paid taxes up front, so all withdrawals in retirement are completely tax free. That tax-free growth and withdrawal benefit differs from what you get with traditional IRA funds, where you must pay ordinary income taxes on every withdrawal. 

Additionally, Roth IRAs are not subject to Required Minimum Distributions (RMDs). This unique aspect offers you more financial flexibility during retirement since you are not forced to take distributions from these accounts. Instead you can leave the account invested, where the money continues growing tax free. 

Roth IRA Conversion Basics

So now you can see how a Roth IRA conversion may help you pay less taxes and avoid RMDs. Now, let's take a look at how the conversion process works. A Roth IRA conversion involves transferring funds from a Traditional IRA (or another pre-tax retirement account) into a Roth IRA.

As we have discussed, the key distinction lies in how these accounts are taxed. While Traditional IRAs are funded with pre-tax dollars and taxed upon withdrawal, Roth IRAs are funded with after-tax dollars, allowing for tax-free growth and withdrawals. So as part of the conversion process, you will pay taxes on the amount transferred into the Roth. 

The converted amount is treated as taxable income in the year of the conversion, potentially impacting your current tax liability. This upfront tax payment can be a significant consideration. Still, it paves the way for tax-free earnings and withdrawals in the future, a benefit that can be especially valuable in retirement.

Fortunately, there is some flexibility in the conversion. You don't have to convert your entire account at once. Instead, you can spread the conversion over several years, which can help you avoid getting forced into higher tax brackets.

Then, there are a few conditions. You may not withdraw earnings within five years of the conversion. Even if you are older than age 59.5, which is the normal age you can start withdrawing money penalty-free, the five year conversion rule still applies. So, you will want to be sure you don't need the money for at least that amount of time.

The critical thing to remember is that to convert, you'll have to pay income taxes on the entire amount converted over to a Roth IRA account. This brings up another aspect of these conversions: timing.

Timing Your Roth IRA Conversion After Age 60

Younger individuals often favor Roth IRA conversions since they will have many years to enjoy tax free growth and withdrawals. However, conversions can also be beneficial for taxpayers over age 60. One reason is that those over 60 might be earning less than they did in previous years, which means the cost of the conversion will be less due to them being in a lower tax bracket. 

Then, converting can help you avoid required minimum distributions, which can push you into higher tax brackets in your retirement years. So, by converting around age 60, you do get the one-time tax hit. However, you then benefit from no RMDs, which generally should help lower your tax bills in the future. 

Regardless, you're faced with a tax bill in the year (or years) you convert. That's why it is wise to do these conversions when the markets drop since the taxes are calculated based on the current value of your IRA assets. Other favorable times for this are years when your income might be lower, so the tax can be part of a lower tax bracket.

At Holland Capital Management, we work closely with our clients to find the right time and pace of conversion. That might mean doing it when the market hits a low point or stretching conversions over a few years to "fill up" tax brackets and avoid paying a higher tax rate than needed.

Critical Advantages of Roth IRAs for HNW Individuals

Most high-income individuals can't contribute directly to a Roth individual retirement account. That's because Roth IRA contributions are phased out once your income exceeds $146,000 (for single filers for 2024). Fortunately, you can work around those income caps with Roth IRA conversions (as well as other strategies such as the Backdoor Roth IRA conversion). The good news? Regardless of your income, there is no limit to how much you can convert from a regular IRA to a Roth in any year.

Then, once converted, you can enjoy all the benefits of tax free growth, tax free withdrawals and no required minimum distributions. 

For higher income and high net worth, there are other advantages as well:

  • Greater control of your tax bill. Roth accounts allow you to avoid paying taxes on withdrawals as long as you follow IRS rules. Having this "tax free" pot of money can help immensely with tax planning, as you can dip into it strategically to avoid staying out of higher tax brackets, thus lowering your overall tax liability.
  • Flexibility in estate planning. Roth IRAs allow you to plan for tax-free inheritances, making them a unique tool in legacy planning.

Who Should Consider Converting to a Roth IRA?

Analysis is always required to determine if a Roth conversion could benefit you. Ideal candidates anticipate being in a higher tax bracket in retirement compared to their current status, as the tax-free withdrawals of a Roth potentially offer significant savings down the line. Additionally, those with a substantial amount of time before retirement can significantly benefit, as it allows more time for the investments to grow tax-free, maximizing the potential benefits of the conversion. It's also a prudent choice for individuals seeking to leave a tax-efficient legacy to their heirs, given the Roth IRA's exemption from Required Minimum Distributions (RMDs) and its provision for tax-free inheritance.

Who Should Not Consider Converting to a Roth IRA?

Sometimes, however, putting money from a traditional IRA into a Roth may not make sense. Individuals who might want to think twice before converting are those who expect to be in a lower tax bracket in retirement. Since the conversion triggers a taxable event at current rates, it may not be cost-effective if your future taxes are likely to be lower. Also, those needing access to their retirement funds in the near term, specifically within five years, should be cautious about converting to a Roth.

Additionally, people with limited time to recoup the tax payment on the conversion, such as those nearing retirement, might find the immediate tax cost outweighs the long-term benefits. Lastly, individuals with a primary goal of leaving their IRA assets to charity may not benefit as much since traditional IRAs can offer tax-efficient ways to make charitable bequests.

Optimizing the Timing of Roth IRA Conversions

Timing is a pivotal factor in converting IRA funds to a Roth, especially for high-net-worth individuals. Here are key considerations:

  • End-of-Year Analysis: Converting later in the year often makes more sense since you can more accurately assess your annual income and tax bracket. Then, you can decide to execute the conversion or determine if waiting until the following year is better. So, evaluating the decision to convert to a Roth IRA in November or October might be appropriate, for example.
  • Capitalizing on Market Weakness: An ideal time for opening a Roth IRA and converting can be during market downturns. When markets drop, the value of your Traditional IRA may decrease, which means converting at this time could lower the tax impact since you're converting a smaller dollar amount. This strategy allows the subsequent recovery and growth of these funds to occur within the Roth IRA, where it remains tax-free, potentially maximizing your after-tax returns.
  • Phased Conversions: Spreading the conversion over several years can help manage tax liabilities by potentially avoiding a push into a higher tax bracket.
  • Life Events and Income Changes: Significant life events, like retirement or selling a business, can alter your tax situation. These changes can sometimes create opportune moments for a Roth conversion.
  • Pre-RMD Planning: Converting before age 72 can reduce future RMDs from Traditional IRAs, potentially lowering your taxable income in retirement.

The Role of Roth IRA in Diversified Retirement Planning

There's one other reason we are a fan of converting some savings to a Roth IRA, if possible. Diversification isn't just about spreading your investments across different asset classes; it also can help you manage your taxes in retirement. By having both Traditional and Roth IRAs, you're giving yourself more room to navigate to lower tax bills when possible. 

This diversification allows you to strategically choose from which account to withdraw funds based on your tax situation each year in retirement, potentially saving significant taxes over the long term.

Roth IRA Conversion: A Tool for Active Estate Planning

For those with substantial estates, conversion of a traditional IRA to a Roth IRA presents an opportunity to pass on wealth more efficiently. Since Roth IRAs do not require RMDs, you can let your investments grow tax-free for your entire lifetime, offering your beneficiaries a potentially more significant, tax-free inheritance. This aspect of Roth IRAs can be very helpful in passing down your wealth in the most tax-efficient way possible. 

Understanding the Impact of State Taxes

Your state’s tax structure can also influence the Roth conversion decision. If you reside in a state with high income taxes, converting to a Roth IRA while still a resident may not make sense. On the other hand, if you plan to move to a state with lower or no income taxes in retirement, waiting to convert may be wise.

The Psychological Comfort of Tax-Free Withdrawals

As you are progressing toward your retirement goals, there's usually an inherent comfort that Roth owners don't have to worry about those withdrawals getting taxed. Regardless of your age, this can lead to a more relaxed retirement mindset, knowing you can make tax-free Roth IRA withdrawals. For many, this peace of mind is a significant factor in assessing whether a conversion makes sense. 


What types of IRAs are eligible for a Roth conversion?

In addition to a traditional IRA, you can also convert SEP IRA or Simple IRA assets to a Roth IRA.

Can I Undo a Roth Conversion if I Change My Mind?

Prior to the Tax Cuts and Jobs Act (TCJA), a conversion could be "recharacterized" back to its previous form. However, the TCJA changed that, and now it is no longer allowed. So be aware that converting funds to a Roth IRA will be permanent.

How Much Tax Will I Pay If I Convert My Traditional IRA to a Roth IRA?

The amount of tax you'll pay when converting a Traditional IRA to a Roth account depends on a few key factors. Primarily, the converted amount is added to your taxable income for the year, so the tax rate applied will be your current income tax rate. For example, if you're in the 24% tax bracket and convert $50,000, you could end up with an additional tax bill of around $12,000. However, it's important to note that adding the conversion amount to your income could potentially push you into a higher tax bracket, increasing the rate at which the conversion (and possibly your other income) is taxed. Additionally, state taxes may apply, depending on where you live.

As you can see, it's crucial to calculate the potential tax impact before proceeding with a conversion, considering both your current tax bracket and any potential shift to a higher bracket due to the added income. Always consult your tax professional as well as your financial advisor.

Does the Five-Year Rule Apply to Roth Conversions After Age 59½?

Yes, the five-year rule applies to Roth conversions even after age 59½. This rule requires that funds converted from a Traditional IRA to a Roth IRA must remain in the Roth account for at least five years to qualify for tax-free withdrawals. It's important to note that this five-year period starts on January 1st of the year you make the conversion. If you withdraw the converted funds before the five-year period is up, even if you're over 59 ½, the earnings on those funds may be subject to taxes and penalties. However, the principal amount you converted (your original investment) can be withdrawn tax and penalty-free, as you've already paid taxes on it at the time of conversion.

Conclusion: Using Financial Planning Strategies to Maximize Your Resources and Future

In conclusion, converting a Traditional IRA to a Roth IRA after age 60 is a decision that goes beyond mere tax calculations. It's just an example of one of many strategies we use at Holland Capital to help our clients save on taxes and achieve their financial and estate planning goals. So whether you are converting your first Roth IRA or have multiple Roth accounts already, we find prioritizing tax planning always provides a way to keep more of your money working for you.