I'm 55 With $900,000 in an IRA. Should I Convert $100,000 Annually to a Roth to Reduce RMDs?

At age 55 with $900,000 in a traditional individual retirement account (IRA), converting $100,000 per year to a Roth IRA could help reduce required minimum distributions (RMDs) and related taxes in retirement. Although Roth conversions create current tax liabilities, paying taxes now may result in more predictable and lower lifetime taxes.

Taking an incremental Roth conversion approach can effectively distribute the tax impact over time and keep you in lower tax brackets depending on your total income in any given year rather than making the conversion all at once. Moving your nest egg to a Roth IRA will not only help you avoid RMDs, it'll also also protect your withdrawals from income taxes down the road, despite the initial tax hit on the conversion.

For personalized guidance on Roth IRA conversions and other retirement planning decisions, consider working with a financial advisor who can review your full financial picture.

As a retirement saver using a traditional IRA , you are free to leave your retirement savings in the account to grow tax-free, but only up to a point. Once IRA holders reach age 73, they must start taking annual RMDs. The amount of each RMD is based on IRS life expectancy tables and account balances. This is a matter of concern because each RMD withdrawal adds to taxable income for that year. With large IRAs, annual RMDs can easily push retirees into higher income tax brackets , resulting in bigger tax bills down the road.

Since a Roth IRA isn't subject to RMD rules, converting a traditional IRA to a Roth account can allow a saver to avoid some future mandatory withdrawals. The catch is, when you convert IRA funds into Roth funds you trigger ordinary income taxes immediately. One way to manage this is to take an incremental conversion approach, distributing the tax impact over time and potentially reducing the total tax burden.

Note that if you do choose to pursue a Roth conversion, you won't be able to make withdrawals within five years of opening the account. This rule applies regardless of your age. A financial advisor can help you navigate the intricacies of a Roth conversion.

Starting with a $900,000 IRA at age 55, assuming a 5% annual growth rate and no contributions or withdrawals, your IRA would be worth approximately $2,165,957 when you turn 73 in 18 years. Dividing $2,165,957 by the IRS life expectancy factor of 26.5 for a 73-year-old gives you $81,734. This would be your first-year RMD.

Adding that $81,734 distribution to other retirement income sources increases the tax rate that applies to the RMDs.