I’m 70 Years Old With $1.2 Million in an IRA. Is It Too Late to Convert to a Roth IRA?

In retirement, it’s not too late to convert your money into a Roth IRA. The IRS will let you convert qualified funds at any time, as long as you pay the associated taxes.

It might, however, be too late to get real benefit from that decision. A Roth IRA works best when it has time to grow, and when you can take advantage of tax arbitrage between current (lower) rates and future (higher) ones.

For example, say that you’re 70 years old with $1.2 million sitting in your IRA. Legally it’s not too late to convert that money into a post-tax account. Practically, however, you’d pay around $400,000 in conversion taxes in exchange for the benefit of avoiding required minimum distributions (RMDs) and tax-free growth for the future.

Investors who hold money in a pre-tax portfolio, like a traditional IRA or a 401(k), can make what’s called a Roth conversion. This is when you move assets from your pre-tax portfolio and put it into a Roth IRA. A Roth conversion has no limits, unlike contributions made from earned income. You can convert assets in any amount and as often as you like. Otherwise, at 70 you must still have qualifying earned income through work or a business to make regular contributions, which are capped by an annual limit.

The main advantage to a post-tax Roth IRA is withdrawals. You pay no taxes on any withdrawals from a Roth IRA, both principal and returns. This is as opposed to a pre-tax portfolio, for which you pay no taxes on the money you contribute but full income taxes on money you withdraw. A Roth IRA also has no RMD requirements, letting you hold investments as long as you like.

This tax status makes a Roth IRA good for estate planning, as your heirs will also be allowed to take the money tax-free. This is as opposed to a pre-tax account like a traditional IRA on which your heirs would pay income taxes.

Consider discussing how a Roth conversion would impact your retirement and estate planning goals with a financial advisor.

The main disadvantage to a Roth IRA is its contribution tax status. You pay full income taxes on money you put into this account, whether through contributions or conversions. For example, say that you convert $1.2 million from your traditional IRA to a Roth IRA. You would include that $1.2 million in your taxable income for that year, and would need available cash to pay the resulting taxes. Converting this amount will likely put you into the highest tax bracket of 35%.

You can manage these taxes by converting money in smaller, staggered amounts to stay within lower tax brackets, but you cannot avoid them altogether. 

It’s also important to consider how and when you’ll need to withdraw this money in your retirement. Any money you convert into a Roth IRA must also remain in place for at least five years. For example, if you convert money into a Roth IRA at age 70, you would not be allowed to withdraw it without penalty before age 75.

A financial advisor can help you plan for accounts with comingled funds, which is when some money is accessible but some remains locked up.

It’s easy to think that a Roth IRA is automatically the better choice. After all, the Roth portfolio enjoys tax-free growth and withdrawals. So if you put in $1 and it grows to $10, with a Roth IRA you only pay taxes on the $1. With a traditional IRA you pay taxes on all $10.

The problem is that the tax you pay on contributions and conversions is all money that you could have invested. So, for example, say that you roll $1.2 million from your traditional IRA into your Roth IRA. If done in one lump sum, that would cost about $399,000 in taxes. If invested at an 8% rate of growth, by age 75 that’s the difference between having $1.76 million in savings and $1.17 million.

So the rule of thumb is this:

A Roth investment is a good idea if you currently pay lower taxes than you expect to pay at withdrawal, so that you exchange the current lower rate for the higher future one (tax arbitrage). It is also a better idea the longer your money has to grow in this account tax-free.

A pre-tax investment is a good idea if you currently pay higher taxes than you expect to pay at withdrawal, so that you exchange your current higher rate for a future lower one (capital maximization). 

A financial advisor can help you do a personal evaluation of the pros and cons in your situation.

So, say you’re retired. You are sitting on $1.2 million in a traditional IRA at age 70. Is it too late to convert your savings to a Roth IRA?

No, it is not legally too late. The IRS allows you to make a conversion at any time so long as you have qualifying funds, such as a traditional IRA, and can pay the conversion taxes. At age 70, you can take that money from your IRA. This gives you the money to pay your conversion taxes, but reduces your portfolio by the amount of the tax bill.

However, there’s a good chance that it’s too late for you to get any real value from this account. By age 70 you likely have your retirement income established. It’s unlikely that you will pay a significantly different tax rate in later years than you do today. Ideally your portfolio still has plenty of time to grow, but the tax-free growth probably won’t offset the lost capital. 

Take our example above. If you convert this money in one lump sum you might have about $1.17 million in your Roth portfolio at age 75. At a 4% withdrawal rate, that’s about $46,800 of after-tax income. If you don’t convert this money, you might have about $1.76 million in your traditional IRA. At a 4% withdrawal rate, that’s about $62,651 in after-tax income (excluding state and local taxes).

Now, this is a clumsy example. You would most likely convert this money in stages to avoid the highest tax brackets, increasing the value of your Roth portfolio. But the point is that you don’t have much room for benefit here. Unless you expect your income to significantly decline later in retirement, you don’t have a future tax gain to offset the current bill you would pay. 

And that’s to say nothing of the fact that you would lock up your retirement portfolio for five years… right at the time you need it most. 

A Roth conversion might make some sense if this is a supplemental retirement account. Then, a few edge cases might make this useful for money management. For example, converting your money to a Roth portfolio would let you take out big, one-time withdrawals (like for a new car or a big trip) without triggering higher taxes that year. It can also be useful for estate planning, if you would like to leave your heirs a valuable, tax-free asset. But these cases are relatively niche, and still might not offset the value lost to taxes.

When it comes to income and personal savings, the odds are that a Roth conversion at age 70 won’t save you much money, and it might actually do more harm than good.

At age 70, it isn’t too late to legally build a Roth IRA. However converting your savings mid-retirement is a risky move, and it might well end up costing you much more over the long run than you will save on taxes.

• Now let’s look at this from another point of view. Say that you already have a Roth IRA in place and you’re winding down with work. What should you do with your Roth IRA once you retire? 
• A financial advisor can help you build a comprehensive retirement plan. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

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