Quick Read $1M in a 401(k) exceeds 95% of American retirement balances but creates tax traps costing six figures. RMDs starting at age 73 can push income into 24% or 32% tax brackets without early Roth conversions. Income exceeding $106K individual or $212K joint triggers $2K to $5K in annual Medicare IRMAA surcharges. A recent study identified one single habit that doubled Americans’ retirement savings and moved retirement from dream, to reality. Read more here. A $1 million 401(k) balance puts ...

Core Insights - A Roth conversion is a trade-off involving immediate tax payments for potential future tax benefits [1] Group 1: Roth Conversion Overview - A Roth conversion transfers funds from a traditional IRA to a Roth IRA, with the converted amount taxed as ordinary income in the year of conversion [2] - Future qualified withdrawals from a Roth IRA are tax-free, providing a long-term tax advantage [2] Group 2: Tax Implications and Timing - It is not necessary to convert the entire IRA balance at once; multiple smaller conversions can be more tax-efficient [3] - Large conversions may push individuals into higher tax brackets, negating potential long-term benefits [3] Group 3: Advantages of Roth IRAs - Roth IRAs do not have required minimum distributions (RMDs) during the owner's lifetime, unlike traditional IRAs which require RMDs starting at age 73 [4] Group 4: When Roth Conversions are Beneficial - Roth conversions are most advantageous during low-income years, such as early retirement or career transitions, when individuals are in lower tax brackets [5] - Additional scenarios where conversions may be beneficial include expecting higher future tax rates, having cash available to pay taxes outside the IRA, and wanting to reduce future RMDs [6] Group 5: Potential Drawbacks of Roth Conversions - The primary drawback is the immediate tax liability, which can be substantial for large IRAs and may lead to higher tax brackets or increased Medicare premiums [7]

Roth conversions to secure tax-free withdrawals during retirement are gaining popularity as Gen X gets closer to retirement, but financial advisers warn that the decision to convert should be carefully considered. Roth conversions are asset transfers from a pre-tax retirement account such as a traditional IRA or 401(k) into a Roth IRA. People pay income tax on the converted amount in the year of the transfer, but the money grows tax-free and withdrawals during retirement are tax-free. Roth accounts also a ...

Core Insights - Converting a 401(k) to a Roth IRA can help avoid Required Minimum Distributions (RMDs), which is a valid tax planning strategy [1][7] - However, for individuals nearing retirement, the tax costs associated with the conversion may outweigh the benefits of avoiding RMDs, potentially leading to a net loss [2] Group 1: Understanding RMDs - RMDs are mandatory withdrawals from pre-tax retirement accounts starting at age 73 (or 75 from 2023) [4] - The amount of RMD is determined by the portfolio's value on January 1 and the account holder's age, with a penalty of 25% for not withdrawing the required amount [5] - Ordinary income taxes apply to RMDs, which can be problematic for those with other income sources or multiple retirement accounts [6] Group 2: Roth Conversions - A Roth conversion involves transferring funds from a pre-tax retirement account, like a 401(k), to a post-tax Roth IRA [8] - The conversion process is straightforward, requiring the opening of a Roth IRA and transferring assets from the pre-tax account, either directly or through a personal withdrawal [9]

Core Insights - The article discusses strategies for Roth IRA conversions, particularly during market downturns, to minimize tax liabilities and maximize tax-free growth potential when markets recover [1][3]. Group 1: Roth IRA Conversions - Converting to a Roth IRA while asset values are low can lead to lower tax bills on the conversion amount, with potential for tax-free growth as markets rebound [1]. - It is advisable to work with an accountant or financial adviser during the Roth conversion process to navigate complexities [1]. - Roth conversions increase adjusted gross income, which can impact Medicare premiums and Social Security taxation [2]. Group 2: Tax Planning Strategies - Individuals should estimate total income, including Social Security, pensions, dividends, and capital gains, to determine their federal tax bracket for 2026 [4]. - Retirees are encouraged to start planning for their 2026 tax bill now, as strategic planning can help reduce future tax liabilities [5]. - It is recommended to convert just enough funds from traditional retirement accounts to stay within the 12% tax bracket [2]. Group 3: Required Minimum Distributions (RMDs) - Skipping RMDs can result in significant tax penalties, with penalties ranging from $1,160 to $2,900 [8]. - RMDs are mandatory withdrawals for individuals aged 73 and older, with specific rules on timing and amounts [9][10]. - Automating withdrawals and consulting with accountants can help manage RMDs effectively [11]. Group 4: Charitable Contributions and Deductions - Qualified Charitable Distributions (QCDs) allow individuals to donate up to $111,000 from their traditional IRA directly to charities, reducing taxable income [15]. - The standard deduction for tax year 2026 will increase to $16,100 for single filers and $32,200 for married couples filing jointly [16]. - Utilizing the higher SALT deduction limit of $40,000 can significantly impact taxable income, especially for retirees in high-tax states [18][19].

Converting your traditional individual retirement arrangement (IRA) or 401(k) account to a Roth IRA often appears to be a clear financial win. Pull some capital from your retirement accounts, pay a little tax upfront, pop it into a Roth IRA and enjoy tax-free growth for the rest of your life. If your investments grow significantly after conversion, you could be saving a pretty penny on taxes. Sounds simple and savvy, right? A Roth IRA is a retirement savings account where contributions are taxed upfront, ...

Core Insights - The article discusses the implications of turning 65 and transitioning to Medicare, particularly regarding Health Savings Accounts (HSAs) and the potential loss of tax advantages associated with them [1][2][3]. HSA and Medicare Transition - Upon turning 65 and enrolling in Medicare, individuals lose the ability to contribute to their HSAs, which can impact their retirement savings strategy [1][3]. - While tax-free withdrawals for qualified medical expenses remain available, the inability to add funds may lead to a decrease in account balance over time unless investments are managed wisely [3][4]. Employer Health Plans and HSA Contributions - Some individuals may choose to remain on their employer's health plan while also enrolling in Medicare Part A, but this decision prevents further HSA contributions [4]. - Flexible Spending Accounts (FSAs) can serve as an alternative for tax-advantaged savings for those who continue working while on Medicare, with a contribution limit of $3,400 for 2026 [5]. Long-term Tax Planning - For those who enroll in Medicare and continue working, long-term tax planning becomes essential to manage expected tax liabilities throughout retirement [5][6]. - A Roth conversion is suggested as a strategy to maintain tax-free growth and withdrawals, particularly beneficial for high-income retirees facing potential tax rate increases in the future [7].

Core Insights - The article discusses a couple's financial planning for early retirement, focusing on downsizing their home and managing income sources while addressing health and lifestyle changes. Financial Planning - The couple plans to sell their home valued at $1 million and downsize to an apartment in a no-income-tax state, which could help with their financial situation and Roth conversion strategy [4][17]. - They have a combined 401(k) balance of $1.1 million and $800,000 in stocks, along with $500,000 in home equity, indicating a strong financial position for retirement [6][15]. - The couple is considering part-time work as a Lyft driver, which could generate an additional $30,000 a year, providing flexibility while managing living expenses [2][12]. Retirement Timing and Income - The individual plans to stop working at age 60 while the spouse continues for two more years, utilizing the Affordable Care Act for health insurance until they reach 65 [5][10]. - Social Security benefits will be claimed at age 70, with the maximum monthly benefit being $5,108 for those who wait until that age [13][14]. Health and Lifestyle Considerations - The couple aims to focus on health and diet post-retirement, recognizing the importance of maintaining physical well-being as they age [3][11]. - The stress from current jobs is a significant concern, and transitioning to retirement is seen as a way to alleviate this stress, although it may introduce new challenges [7][9]. Tax and Insurance Strategy - The couple is considering a Roth conversion strategy to manage their tax liabilities and maximize insurance subsidies, particularly in light of potential changes to ACA premium tax credits [16][17]. - The article highlights the importance of planning annual Roth conversions to stay within income thresholds and manage ACA premiums effectively [16].

Core Viewpoint - A Roth conversion is considered a strategic option for retirement income planning, particularly for individuals in lower tax brackets, as it can lead to tax savings in the long run [4]. Group 1: Roth Conversion Considerations - The individual is over 59 ½, which means they are not subject to the 10% early withdrawal penalty for distributions taken less than five years after a Roth conversion [3]. - There are three different five-year rules associated with Roth IRAs, which can lead to confusion [2]. - The primary reason for a Roth conversion is to save on taxes, especially for individuals with a stable income from pensions [4]. Group 2: Income and Tax Bracket Analysis - The individual has an annual income of $65,000 from a pension, placing them in a marginal tax bracket of 22% if single, or 12% if married filing jointly [5]. - Given the nature of pension income, it is unlikely that the individual's nominal income will decrease in the future, suggesting stability in their tax bracket [6]. - The Tax Cuts and Jobs Act provisions are set to expire at the end of 2025, which may lead to increased income tax rates unless Congress acts [7]. Group 3: Strategic Planning - It may be beneficial for the individual to gradually fill their current tax bracket with Roth conversions over several years [8]. - Consideration of state income taxes and potential relocation to a state without income tax is also advised [8].

If you decide a Roth conversion is worth it for you, it is critical to do it when your tax rate is lower than you expect it to be in retirement. That could be a low-income year or a year in which you lost a job. - MarketWatch illustration/iStockphoto Welcome to Day 7, the final installment in MarketWatch’s seven-part money challenge. We’ve published one tip a day for seven business days. We hope these ideas have inspired you to take control over some aspects of your finances in 2026 and to set yourself up ...