As the traditional age of retirement approaches, many investors find themselves staring at a significant tax liability hidden within their tax-deferred accounts. For an individual reaching age 65 with a $1.2 million balance in a traditional IRA, the transition from the wealth-building phase to the distribution phase introduces a complex set of financial hurdles. The central question often becomes whether it is too late to execute a Roth conversion, especially when Social Security benefits are already part of the monthly income equation.
Executing a Roth conversion at 65 is not merely a matter of moving money from one bucket to another; it is a strategic tax maneuver that requires a deep understanding of current and future tax brackets. By converting traditional IRA assets to a Roth IRA, the investor pays income taxes on the converted amount today in exchange for tax-free growth and tax-free withdrawals in the future. For someone with a seven-figure balance, this can be an effective way to mitigate the impact of Required Minimum Distributions, which currently begin at age 73 or 75 depending on the birth year. Without a conversion strategy, those mandatory withdrawals could push a retiree into a much higher tax bracket later in life.
However, the presence of Social Security benefits adds a layer of friction to this decision. When a retiree converts a large sum from an IRA, that converted amount counts as ordinary income. This spike in reportable income can trigger the taxation of Social Security benefits. Up to 85 percent of Social Security payments can become taxable if a taxpayer’s combined income exceeds certain thresholds. Furthermore, a large Roth conversion can lead to the dreaded Medicare surcharges known as IRMAA. These income-related monthly adjustment amounts can significantly increase the cost of Medicare Part B and Part D premiums for two years following the conversion year.
To navigate these risks, many financial planners suggest a multi-year ladder approach rather than a single lump-sum conversion. By converting smaller portions of the $1.2 million balance over several years, a retiree can stay within their current tax bracket while gradually reducing the size of the traditional IRA. This method allows the investor to fill up a specific tax bracket, such as the 22 or 24 percent tier, without accidentally triggering the highest marginal rates or massive spikes in Medicare costs. This gradual shift also preserves more of the principal for tax-free growth, which is particularly beneficial for those who intend to leave an inheritance.
The legacy aspect of the Roth conversion is often the deciding factor for those in their mid-sixties. Under the current tax laws, most non-spouse beneficiaries must fully distribute an inherited IRA within ten years. If a child inherits a large traditional IRA during their own peak earning years, the resulting tax bill can be devastating. By paying the taxes now at the age of 65, the original account holder is essentially gifting their heirs a tax-free asset, which can be a powerful estate planning tool.
Ultimately, the decision to convert at 65 depends on the retiree’s liquid cash reserves and their anticipated spending needs. Taxes on the conversion should ideally be paid from brokerage accounts or cash savings rather than the IRA itself to maximize the amount of money moving into the tax-free Roth environment. If the retiree has the cash on hand to cover the IRS and the patience to weather a few years of higher Medicare premiums, the long-term benefits of eliminating future tax uncertainty often outweigh the immediate costs. While 65 is certainly not too late, it is an age that requires surgical precision to ensure the strategy does not create more short-term pain than long-term gain.
