My wife and I have $850,000 saved for retirement. I'm 66 and plan to work another four years. Should I do a Roth conversion?

By Alessandra Malito

'I estimate that my wife and I will receive about $4,600 per month in Social Security'

Dear MarketWatch,

I'm 66 years old and I hope to work until age 70. At that time, I estimate that my wife and I will receive about $4,600 per month in Social Security and all my major bills (house, cars, etc.) will be paid off.

We currently have about $850,000 saved up, mostly in conventional IRAs and 401(k) plans. Should I start converting some of my conventional IRAs or 401(k) money to Roth IRAs?

Roth Strategizer

Related: I've $5.2 million in the stock market and I'm in my 40s. How much can I afford to spend so I can enjoy the rest of my life?

Dear Roth Strategizer,

You ask the age-old question. So many people wonder if and when they should do Roth conversions, especially as they get closer to retirement.

There are a few questions you need to ask yourself in order to get the right answer.

The first has to do with tax brackets, as that is one of the most important aspects of Roth conversions. Typically, you want to do Roth conversions, or contribute to a Roth outright, when you're in a lower tax bracket than you expect to be at distribution. That poses a problem for someone who is in his or her peak earning years, as you might be since you are only a few years away from retirement.

I will add though - the tax rates may change soon. The current brackets, set forth under the Tax Cuts and Jobs Act, are set to sunset in 2026, reverting back to what they were prior to the law passed under the Trump administration. The Tax Cuts and Jobs Act cut the tax rates and changed the brackets to which those rates applied. Therefore, tax rates are now 10%, 12%, 22%, 24%, 32%, 35%, and 37%, according to PNC Bank. On Jan. 1, 2026, the rates return to their pre-TCJA amounts of 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%. This will, and should, factor into your tax planning and your Roth conversions.

I mention the possible change in tax law because it could affect how you view your timeline for the conversions. If you wait too long, you might be subject to a higher bracket than if you were to do it now, even if it does mean you're earning more than you will at retirement.

Another important factor is the five-year rule. Many people think they just need to be 59 1/2 years old to tap into their retirement accounts penalty-free, but Roth accounts have additional rules. The Internal Revenue Service instituted a five-year waiting period on assets converted to a Roth, and the clock starts over for each tax year.

For example, say you converted money in 2024 and again in 2025, the waiting period for the assets converted in 2024 would expire in 2029, and the assets that were converted in 2025 would expire in 2030. This means you have to pay close attention to how money is distributed from your accounts, so that you're not taking out money that could be subject to taxes as a result of "early" distribution. It also means you need to consider it in your conversion plans if you intend to rely heavily on the money in a specific year.

There's no one right answer when it comes to Roth conversions. Having money in Roth accounts is a great way to provide yourself with tax diversification in retirement, which allows you to choose where your retirement income comes from and how much you pay in taxes in any given year. But it does require a balancing act in the short term.

If you're not sure where you fit into your current tax bracket, a qualified and trustworthy financial planner or accountant can help you make sense of that. One strategy that's pretty popular among advisers is to calculate how much of a gap you have between your adjusted gross income and the top of your tax bracket. For instance, a couple who is married filing jointly and in the 22% bracket has annual income between $94,300 and $201,050. If together, you two earn $150,000 a year, you would still have just a little more than $50,000 of income left in your tax bracket before you're pushed into a higher bracket.

With this strategy, you would still have to pay taxes now rather than later (and perhaps it would be more, we can't know for sure), but this way, at least you're not pushing yourself into a higher tax bracket by making these Roth conversions.

By submitting your story to Dow Jones & Co., the publisher of MarketWatch, you understand and agree that we may use your story, or versions of it, in all media and platforms, including via third parties.

Readers: Do you have suggestions for this reader? Add them in the comments below.

Have a question about your own retirement savings? Email us at HelpMeRetire@marketwatch.com

-Alessandra Malito

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

04-27-24 1001ET

Copyright (c) 2024 Dow Jones & Company, Inc.