Considering a Roth Conversion at 65: Is It Right for You?
Reaching 65 years of age is a significant milestone for many, marking the start of retirement for a majority. At this stage, it’s crucial to assess your financial situation to ensure a comfortable lifestyle. For individuals like you, with $1.4 million in Individual Retirement Accounts (IRAs), the decision of whether to convert to a Roth IRA can have long-term implications. So, should you pursue a Roth conversion? Here’s an in-depth look at the potential benefits and considerations.
Understanding Roth IRA Conversions
A Roth IRA is a retirement account that allows for tax-free growth and tax-free withdrawals in retirement, provided certain conditions are met. When you convert a traditional IRA to a Roth IRA, you pay income taxes on the amount converted in the year of the conversion. However, future withdrawals, including earnings, are tax-free—as long as you follow the rules.
Benefits of Converting
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Tax-Free Withdrawals: One of the biggest advantages of a Roth IRA is that, unlike traditional IRAs, you won’t owe taxes on withdrawals, assuming you’re over 59½ and have held the account for at least five years. This can provide significant tax savings, especially if you expect to be in a higher tax bracket in your later retirement years.
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No Required Minimum Distributions (RMDs): Traditional IRAs require you to start taking distributions once you turn 73 (as of 2023). Roth IRAs do not have RMDs during the lifetime of the account owner, allowing your savings to grow tax-free for a longer period if you don’t need the funds immediately.
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Estate Planning Benefits: If you plan to leave assets to heirs, Roth IRAs can be more beneficial. Your beneficiaries will inherit the account and can withdraw funds tax-free, allowing more of your investment to pass on to them rather than being diminished by taxation.
- Diversification of Tax Strategy: Having both traditional and Roth accounts can diversify your tax liabilities in retirement. By converting part or all of your traditional IRA to a Roth IRA, you can create flexibility in your withdrawals, allowing you to manage your tax situation more effectively.
Things to Consider Before Converting
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Tax Implications: One of the most significant downsides to a Roth conversion is the immediate tax liability. Since you would pay taxes on the converted amount during the year of the conversion, it’s important to evaluate your current tax bracket versus your expected tax bracket in retirement. If converting pushes you into a higher tax bracket, it may diminish the advantages.
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Impact on Social Security: The additional income generated by converting a large portion of your IRA may affect taxes on your Social Security benefits. If you convert a substantial amount, you could trigger higher taxation on your benefits.
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Cash Flow Needs: Consider your cash flow needs in the year that you plan to convert. If you will need to exit a substantial amount, it may be better to keep your traditional IRA, especially if doing so would minimize your tax liabilities.
- Future Tax Law Changes: Tax laws can change, and future rates or policies may affect the attractiveness of a Roth conversion. Staying informed and consulting with a financial advisor can help you make the best decision based on current and anticipated future rules.
What Should You Do?
Ultimately, the choice to convert to a Roth IRA at the age of 65 with $1.4 million in IRAs depends on your individual financial situation, tax strategies, and retirement goals. Here are actionable steps you should consider:
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Evaluate Your Current Tax Situation: Analyze your income sources and expected tax bracket. Are you in a relatively low tax bracket now? This scenario might make a conversion more attractive.
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Consult a Financial Advisor: Engage a financial planner or tax advisor who can provide personalized guidance based on your unique circumstances and help you crunch the numbers.
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Consider Partial Conversions: If a full conversion seems too taxing, consider doing partial conversions over several years to spread out the tax liability.
- Plan for Future Income Needs: Make decisions based on both your short-term and long-term financial needs to ensure you can maintain your desired lifestyle throughout retirement.
Conclusion
Deciding whether to convert to a Roth IRA is an important financial decision, especially as you approach or enter retirement. With $1.4 million in IRAs, the proper strategy can help maximize your retirement income and provide estate benefits for your heirs. Take the time to assess your situation critically, gather advice, and ensure you make informed decisions that align with your financial goals for a comfortable and secure retirement.
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Our government just don't appreciate us in investing money on their behave. We should be rewarded rather than being punished.
1:41 time mark: Timing the Market. This is voodoo financial advice. IT DOES NOT MATTER whether you take money after tax and invest it or let it sit pre-tax and tax it upon withdrawal. All other factors being equal, the final closing (after tax) dollar amount of each fund will be the same.
So, the relevant discussion isn't about the strategy – both strategies have pros and cons – it's about "the other factors". Namely tax bracket now vs. tax bracket at time of withdrawal, that's the number one issue. The number two issue is the effect of RMDs on the individual's tax outlook. There are other issues, but those are the two main ones that most YouTube videos focus upon.
This video appears (to me) to be hocus pocus made-up retirement math. There's nothing presented to back up the numbers given here. There is simply too much missing information to be able to replicate any of the examples. And it shouldn't be that way.
For example: 7:05 time mark discussion of Conventional Wisdom strategy recommends taking money from non-IRA accounts first and letting IRA accounts defer until you need the income. WHERE IN THE VIDEO'S EXAMPLE IS THE MONEY FROM THE NON-IRA ACCOUNTS SHOWN???
IMO, it's not shown because it shows that the Conventional Wisdom strategy is right as far as spending non-IRA accounts first is concerned. That is not the problem with Conventional Wisdom. (There are other problems with it that make ROTH conversion preferable, but I won't go into those details. That would make this comment much too long.)
And the analysis (16:32 time mark) showing more taxes being paid in a regular IRA account versus a ROTH account is LUDICROUS. Of course, you're paying more taxes. The IRA account has compounded over time and it's a lot bigger revenue stream that gets appropriately taxed more. The ROTH starts off with paying taxes first, so it's a lot smaller account with commensurately smaller taxes. That's the way they are designed to work. As far as the math is concerned, all other things being equal, it doesn't matter whether you pay the tax first then allow the ROTH fund to grow tax-free or whether you put the money into a regular IRA fund to grow with compound interest then pay the tax at the end.*
* – But "all other things being equal" is seldom the case. This video presents some of the other factors that need to be considered – but does so in a manner that obfuscates the picture. Bits of truth, mixed in with assertions that are outlandish.
Bottom line: Don't believe everything you hear. Crunch the numbers yourself. If you can't do it yourself, hire a financial advisor to do the numbers for you.
I have over $200k ready to be invested, however I am having trouble trying to find out what investments would be best during this present economy. Heard index funds and ETFs provide diversified stock market exposure while spreading risk. How true?
I am age 77 and my wife is 70. Both of us are getting $50K social security. I have $500K
in traditional IRA under my name. Other incomes are pension, dividends from taxable accounts, interests and RMDs. Our AGI is already to the max of 22% (MFJ). Well, considering my age and a relatively smaller IRA, is it still worthwhile to do a Roth conversion. Please advise. Thanks.
If we revert back to the 2017 tax code in 2026 will we again be allowed to recharacterize a Roth conversion?
You didn't talk about Qualified Charitable Donations (QCDs). If I have a fat traditional IRA and plan on taking QCDs then the value proposition of converting to Roth is lower. You pay the tax either way (either during the conversion process or with distributions). With QCDs, however, I get to say where a big chunk of the money goes instead of the IRS just doing whatever they want with it.
Great info. Thks
Great video! So many things to consider. Aside from the tax laws and math, what about the quality of your "go go" years? Using this example, I don't know how many people have $67K (per year for four years) lying around. I don't want to be eating Ramen Noodles for four years. By this example, you would be all set by age 84…the only problem is that you would probably be dead.
Basically we are screwed no matter what we do.
SS & 1.4 million, your good, just try to live off the interest on the 1.4 million and the Social Security
I have been doing ROTH conversions since retirement during the Trump tax cuts. I stay within my 24% bracket and convert about $110k a year and I pay the taxes on it out of my Taxable money. Most of my money was Traditional, so when 2025 ends and taxes possibly go back up (if a Republican doesn't get in to extend them) I still have a lot of unconverted funds. I plan to still convert but staying within the tax bracket at that time only allows me to convert $10k or so. How do you know if going above the current tax bracket is beneficial?
Can a retiree already drawing RMD get into Roth through back door process?
At 16:45 mark it shows a cumulative $330k savings over all the years. But wouldn’t it be a much more meaningful picture to take the difference (year to year) of both columns and discount those numbers back to a present value using a suitable investment rate (or a safe rate)? That would tell you what the value of any future tax savings is to you today and not a cumulative number of decades, which I believe exaggerates the savings.
Great video. We are all seeking for financial independence and a better way of life. This is not difficult to achieve with savvy investing, a frugal lifestyle, and cautious budgeting. I'm glad I learned early on to work hard for financial independence. As Warren Buffet said, he has seen this happen many times in his life. Not an investor, My husband and i never earned more than a middle class salary. We plan to get retired at 58 with a stock portfolio worth $1.7M. We have never sold so much as one share of stock.
Aren’t most people dead by conversion time?
Good video, though I'm not sure converting is best for the average person. For one, I think most Americans will have a substantially lower income in retirement. Few have pensions, rentals, or other investments outside of a 401(k) or Traditional IRA, so their future tax bracket will likely be lower and waiting could work out best in the long run. Also, even if doing a conversion still works out to better numbers, most won't live the 29 years your projection assumes. The life expectancy for the average American man at age 65 is only about 17 years. Again, good analysis, but people should realize this isn't a typical answer and the main takeaway is you really need careful analysis to decide what is right for your particular situation.
I selected this video because the example is pretty close to my own, and I wondered if conversion made sense doing it relatively late with a modest ira account. Pleased to see it did. Like the graphs. But did you say there was something different regarding Soc Security between the 2 examples? I didn't get what that was.
Can I roll over to Roth before 59 1/2 without a penalty? I have a 1M traditional IRA and a $300K inherited IRA?
So, you’re splitting up the $1M roll over into 4 separate rollovers? Why? Can I pay the taxes on the roll over out the $1M account?
How does the 5 year hold rule work from employer traditional IRAs to Roth IRAS?
I always feel like none of these videos pertain to me. I have NO where near that much money. Bottom of the barrel all of my life. They never talk about the little guy who also needs to know what’s best for their future
I don't think the tax savings won't be as high as he indicated due to the Irmaa medicare increase for both which is significant!
It looks like the Trump cuts will end because of the countries and wars we are funding.
You got me thinking….
Focus, dude! We don't need all the tangents.
Also, once the couple goes from married filing joint to a widow filing single, the tax rates become higher sooner. Better to convert to Roth before income drops to 1 social security check and tax rate is higher. Odds of surviving spouse living into 90's is great.
What about the same scenario but you are still working at 65?
Still good in April 2023.
8 minutes into video I haven't learned anything yet except how good these guys are 0
Ok, so the ledger for the conventional example shows taxes of 6K on 30K income.
If the standard deduction for a couple was 25,000 then shouldn't tax be $500 (10% of the remaining 5,000) ?
Is there any particular time of year to perform the conversions? Early in the year, pay the estimated tax, and let the Roth funds grow all year?
I'm on the fence. My wife and I are still working, but I plan to retire before the end of the year at 63. She says she may or may not work. I have been trying to determine if I should or not convert to Roths. With a break even point at 85, it doesn't benefit me as much as my kids. Lucky kids.
Whose bright idea was RMD's…a curse on them!!!
How much can you convert into a roth ira each year
This is a very good analysis. I believe the Roth conversions are even more beneficial if you have a few low-income years, maybe before taking social security and perhaps living off of taxable savings and maybe a pension.