“My question is how much should I convert in my 401(k) every year prior to turning 73 when required minimum distributions kick in?” (Photo subject is a model.) - MarketWatch photo illustration/iStockphoto Dear Help Me Retire, I am married, retired and 68 with an income of $200,000 a year between my pension, Social Security and investments. Everything is pretty much paid for, and we are clearly bringing in more than we spend. My question is how much should I convert in my 401(k) every year prior to turni ...

Ready to talk about taxes? On this episode of Market Sense, we dive into the new tax law, and how it could impact your 2025 taxes. A Fidelity branch leader and former tax preparer will highlight some of the changes and strategies for itemizing, charitable giving and Roth conversions. Plus, all the latest market headlines in 20 minutes. Topics covered: • 2025 tax changes • SALT • Roth Conversion • Charitable Contributions 00:00 Market Sense Introduction 01:39 Latest market headlines 04:22 Latest market headl ...

Core Insights - The article discusses the considerations for converting a traditional 401(k) into a Roth 401(k), particularly focusing on the implications of current and future tax brackets [2][5]. Current Tax Bracket - The current tax bracket is a known value, with an example provided of a combined income placing a couple in the 35% federal tax bracket [6]. - Variability in income from year to year can complicate the determination of the current tax bracket, suggesting that analysis should be conducted later in the year for accuracy [7]. Future Tax Bracket - Estimating the future tax bracket is more complex due to uncertainties over decades, including changes in career, income, and tax laws [8]. - Despite the uncertainties, reasonable assumptions can still provide useful insights for planning [8]. Roth Conversion Considerations - Roth conversions may be beneficial if the current tax bracket is lower than the expected future tax bracket, although being in a high current bracket generally suggests that conversions may be less advantageous [5].

Core Insights - The article discusses the nuances of Roth IRA contributions and conversions, particularly for retirees who may not have earned income [2][3][5]. Group 1: Roth Contributions vs. Roth Conversions - Roth contributions require earned income, meaning retirees relying solely on Social Security or pensions cannot contribute directly to a Roth IRA [5][6]. - Roth conversions allow retirees to move funds from a tax-deferred account to a Roth IRA without needing earned income, as taxes are paid on the converted amount [3][7][8]. - The distinction between contributions and conversions is crucial for retirement planning, as conversions can provide tax benefits even in low-income years [1][5].

Core Insights - Converting a 401(k) to a Roth IRA can be a beneficial strategy for tax-free growth and avoiding required minimum distributions (RMDs) [3][4] - It is advised to avoid converting the entire balance at once to prevent entering a higher tax bracket and increasing Medicare premiums [5][6] - Gradual conversions over several years can optimize tax liabilities and maintain lower tax brackets [6][7] Group 1 - Converting to a Roth IRA allows for tax-free growth and avoids RMDs, which can help reduce taxable income in retirement [3][4] - A full conversion of $1.6 million in one year could push an individual into the top tax bracket, leading to a tax rate as high as 37% [5][6] - Dividing the conversion into smaller amounts over several years can keep the individual in a lower tax bracket, potentially as low as 12% [6]

Core Insights - Financial expert Suze Orman emphasizes the importance of opening a Roth IRA without delay, even with minimal contributions, to avoid future tax complications [1] - The Roth IRA allows for tax-free growth of funds contributed after taxes, with specific conditions for tax-free withdrawals of both contributions and earnings [2] Contribution Rules - Contributions to a Roth IRA can be withdrawn at any time without taxes or penalties, regardless of age or account duration [4] - The five-year rule does not apply to original contributions, allowing for immediate access to the contributed amount [4] Earnings Withdrawal Conditions - To withdraw earnings tax-free, account holders must be at least 59½ years old and have maintained the Roth IRA for a minimum of five years [5] - Failure to meet both conditions may result in ordinary income tax on earnings [5] Timing Considerations - Opening a Roth IRA later in life can complicate access to earnings; for instance, an individual starting at age 58 must still wait five years to withdraw earnings tax-free, even if they are over 59½ [6] Conversion Rules - Roth conversions from traditional IRAs have their own five-year rule, with each conversion starting a new five-year period [7] - Early withdrawal of converted amounts before the five-year period, if under 59½, may incur a 10% penalty despite having paid taxes on the conversion [7]

Core Insights - The article discusses the implications of Required Minimum Distributions (RMDs) and Roth conversions for individuals nearing retirement age, particularly focusing on tax strategies and income management [1][3][9]. Financial Planning Considerations - Individuals with a combined income of approximately $130,000 have the potential to execute Roth conversions before reaching the RMD threshold, which could significantly increase their retirement savings from $2.3 million to an estimated $3.7 million by the time RMDs begin [1]. - The RMDs for a couple could amount to around $140,000 annually, assuming a 7% average growth rate on their investments [1]. - The Medicare Income-Related Monthly Adjustment Amount (IRMAA) surcharges will apply starting at $212,000 for married couples in 2025, which could affect financial planning strategies [2]. Roth Conversion Strategies - Financial advisers recommend considering Roth conversions even before age 63 to optimize tax implications and manage future income levels [3]. - The current tax rate is crucial in determining whether to proceed with Roth conversions, as future tax rates remain uncertain [7][8]. - A Roth conversion up to the top of the 22% tax bracket (currently $206,700 for married couples) could save on tax liabilities, with potential conversions around $75,000 incurring approximately $17,000 in taxes [9]. Cash Flow and Tax Efficiency - Paying taxes on Roth conversions from the conversion amount itself is deemed inefficient, as it reduces the amount transferred to the Roth IRA [11]. - Continuous withdrawals from savings to cover taxes on conversions could impact cash flow over time, especially if done repeatedly [11]. Estate Planning Considerations - Decisions regarding the nearly $4 million accumulated assets should consider whether the funds will be spent, left to heirs, or donated to charity, as each scenario has different tax implications [12][13][14]. - If leaving assets to children, future tax rates must be considered, which complicates planning due to the long time frame before inheritance [14].

Market Impact - New tariffs could increase prices and shake the markets [1] Retirement Planning - Retirees need to know about Roth conversions [1] - Retirees need to know about big purchases [1] - Retirees need to know about diversification [1] - Retirees need to know about staying the course [1]