I'm 58 With $1.7 Million in My 401(k). Should I Convert 10% Annually to a Roth to Reduce Taxes and RMDs?

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Transferring retirement savings from a 401(k) or similar tax-deferred account to a Roth IRA can help keep you from having to make taxable withdrawals by the time your reach your mid 70s. This can reduce your tax burden after retiring, but it won't necessarily save on taxes overall. That's because any funds converted to a Roth are taxed as ordinary income at your current rate, which can lead to a steep tax bill due on your next return.

Conversion may still make sense if you expect to be in a higher tax bracket after retiring and reaching the mandatory withdrawal age, don't need the RMD money, want to preserve wealth for your heirs or in other circumstances. But the most effective conversion strategy is likely not be based on converting a set percentage of your 401(k) each year. Rather, you may be better off calculating the conversion amount based on the effect on your tax bracket.

A financial advisor can help you assess the pros and cons of a Roth conversion strategy. Use this free tool to get matched today.

If you're 58 now and leave your retirement savings in the 401(k) , you'll have to start taking required minimum distributions (RMDs) of pre-determined amounts each year starting at age 75. These withdrawals will be treated as taxable income, and the resulting tax bill will reduce the income you have available to pay living expenses in retirement.

You can convert funds from tax-deferred to tax-free by transferring them from a 401(k), IRA or other tax-deferred retirement savings account to a Roth IRA. Once in the Roth account, the funds are not subject to RMD rules, so you won't have to worry about having to withdraw money you don't need for living expenses.

If you do need the money you've saved for retirement, you can withdraw from Roth accounts without owing any taxes or penalties. The only limitation here is that you must wait at least five years after the conversion before making withdrawals if you make the conversion before you are age 59.5.

Roth conversions come at a cost, however, because the converted amounts will be treated like ordinary income on your current tax return. Converting a large 401(k) can, therefore, lead to a sizable tax bill in the short-term. With this in mind, many people doing conversions opt to do so gradually, converting a portion of the 401(k) year over several years to spread out the tax bill and prevent yourself from entering higher tax brackets where your money will be charged at higher rates.