There’s a reason higher earners tend to reach the end of their careers with little to no money in a Roth IRA. Higher earners are often barred from funding Roth IRAs directly. And for those whose incomes are just below the limit, a traditional IRA might still seem more appealing due to the tax break on contributions.
If you’re a higher earner who’s getting close to retirement, you might assume that your opportunity to fund a Roth IRA has passed. But there’s a move you may be able to make in the coming years that allows you to enjoy the benefits of having a Roth IRA in retirement.
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Even if you were a higher earner for much of your career, you may enter a period of life when your income drops. There’s often a window between leaving a job and when required minimum distributions (RMDs) apply to your traditional retirement savings plans.
During that time, you may be working part-time or not at all. You may be mostly living on Social Security with supplemental withdrawals from your retirement savings.
Either way, if your income is lower for a few years, that gives you an opportunity to do a Roth conversion. If you have a large retirement plan balance, you may be unable to get all of it into a Roth before RMDs become mandatory.
But if you can convert at least some of your savings to a Roth IRA, you can benefit from tax-free withdrawals. You’ll also shield some of your nest egg from RMDs.
You may have a limited window to move some of your savings into a Roth IRA. So, it’s important to proceed carefully and remember that it may be unfeasible to move your savings into a Roth entirely.
Remember, Roth conversions count as income. They could not only drive up your taxes but also have other implications.
For one thing, they could push you over the threshold where your Social Security benefits become taxable. But to be fair, if you’re living on those benefits plus retirement plan withdrawals or part-time earnings, you may already be at that point.
The bigger issue may be Medicare surcharges. If you get stuck with IRMAAs, or income-related monthly adjustment amounts, you could end up paying more for Medicare Part B as well as Part D.
For this reason, it’s a good idea to work with a tax or financial professional on Roth conversions. But don’t assume you’re stuck without a Roth IRA for retirement because you missed the chance to contribute to one of these accounts while you were working. There may still be a limited but feasible window to get some of your money into a Roth IRA and enjoy the perks that come with it.
