Retirement Savings: Why Older Workers Are Turning to Roth Accounts
Why It’s Never Too Late to Convert Your Retirement Savings
At 72, Janice Campbell may not seem like the typical investor in a Roth account. Typically, these investment vehicles are recommended for younger workers who are just starting their careers. However, Ms. Campbell, a retired tech worker, is concerned about her health and the potential expenses of long-term care. She recently decided to change her investment mix and convert a portion of her retirement savings into a Roth I.R.A.
Why Roth Accounts Are Attractive for Older Workers
Financial advisers like Andrea Clark, owner of the Table Financial Planning, say that contributing or converting funds into a Roth account can yield significant tax- and estate-planning benefits for older workers and retirees. A Roth account offers the flexibility of having a tax-free bucket of funds that can be used for large or unplanned expenses.
Avoiding Tax Surprises in Retirement
Financial professionals say that it’s a good moment for people to convert existing retirement accounts from pretax to Roth, as historically low income tax rates are set to increase after 2025 unless Congress intervenes. Roth accounts can save heirs from getting hit with big tax bills from inherited I.R.A.s.
Uncertainty of Future Tax Rates
First, there’s the uncertainty of where tax rates will be in the future. The Tax Cuts and Jobs Act of 2017 lowered individual tax rates, but those cuts were temporary and are set to expire at the end of next year. Unless lawmakers act, the marginal tax rate for the highest earners could revert to roughly 40 percent.
Retirees, Beware: Higher Tax Bracket Looms
Retirees or people approaching retirement who have accumulated large balances in accounts with pretax contributions could find themselves in an unexpectedly high tax bracket once they need to begin taking required minimum distributions at the age of 72. Financial setbacks and the Great Recession have left many retirees without enough of a retirement nest egg.
When to Do It
People who are still working might be able to make Roth contributions through their employer’s 401(k) plan. According to Vanguard’s 2024 How America Saves report, 82 percent of employer 401(k) plans offer a Roth option. Individuals working part-time or in their first few years of retirement are in a good position to undertake Roth conversions because having less taxable income puts them in a lower tax bracket.
Converting to Roth: Consider the Consequences
Money converted to a Roth account is counted as income and taxed at ordinary income rates. Financial advisers say they work to "fill up" brackets without triggering a jump to the next marginal tax bracket. For instance, a single filer earning $150,000 in 2024 could convert up to $41,950 from a traditional retirement account to a Roth account without pushing their income above the $191,950 threshold for the 24 percent tax bracket.
Tax Bill on Conversions: Be Cautious
Advisers recommend against withdrawing more than the amount you want to convert to cover the taxes, since money not rolled over into a qualified retirement account is treated as a withdrawal. For those younger than 59½, this would prompt a 10 percent early withdrawal penalty in addition to the ordinary income tax due on that money.
Conclusion
Converting to a Roth account can be a smart move for older workers and retirees, especially in the current tax environment. By doing so, they can avoid tax surprises in retirement, save their heirs from big tax bills, and have a tax-free bucket of funds for large or unplanned expenses.
FAQs
Q: What is a Roth account?
A: A Roth account is a type of retirement savings account that is funded with after-tax dollars, meaning you’ve already paid income tax on the money. The money grows tax-free, and withdrawals are tax-free in retirement.
Q: Why are Roth accounts attractive for older workers?
A: Roth accounts offer the flexibility of having a tax-free bucket of funds that can be used for large or unplanned expenses, and they can save heirs from getting hit with big tax bills from inherited I.R.A.s.
Q: Can I convert my traditional retirement account to a Roth account?
A: Yes, you can convert your traditional retirement account to a Roth account, but you’ll need to pay taxes on the converted amount. Financial advisers recommend against withdrawing more than the amount you want to convert to cover the taxes.
Q: When should I convert my retirement account to a Roth account?
A: It’s generally recommended to convert your retirement account to a Roth account when you’re in a lower tax bracket, such as during your working years or in the early years of retirement. This can help minimize the tax impact of the conversion.
Q: What are the tax implications of converting to a Roth account?
A: Converting to a Roth account means you’ll need to pay taxes on the converted amount, which can increase your taxable income. However, financial advisers say that this can be a good strategy if you’re in a lower tax bracket and want to minimize the tax impact of the conversion.
Author: www.nytimes.com
Orginal Source link