Opening a Roth Account May Be a Good Move, No Matter Your Age

At 72, Janice Campbell might not seem like your average investor in a Roth account. Those investment vehicles — funded with after-tax dollars instead of the pretax contributions that go into most individual retirement accounts and 401(k)s — are typically recommended for younger workers.

Taxes are paid on the money before it is contributed to the account. For those just starting out in their careers and earning entry-level wages, the appeal is paying taxes at a lower rate than they are likely to be at in 20 or 30 years. This money grows, tax-free, until retirement, at which point withdrawals also are tax-free.

But Campbell, a retired tech worker who is still active and healthy, frequently hiking trails around her Arizona home, is concerned about how her health could change in the coming years and whether she might face the expense of long-term care.

“I think it’s important at our age not to put the burden on our children or grandchildren,” Campbell said. So, at the recommendation of her financial adviser, she recently decided to change her investment mix and is converting a portion of her retirement savings into a Roth IRA.

“Chances are I won’t need that money until later, and it can just grow,” she said.

Advisers like Andrea Clark, who works with Campbell, say contributing or converting funds into a Roth account can yield significant tax- and estate-planning benefits for older workers and retirees.

Clark, owner and founder of the Table Financial Planning, based in Fountain Hills, Arizona, said a Roth account offers the flexibility of having a tax-free bucket of funds that they can dip into for large or unplanned expenses.

As Clark explained, since money taken from pretax accounts like a 401(k) is taxed at ordinary income rates, a large withdrawal to cover, say, nursing home costs, could easily propel someone into a much higher marginal tax bracket and possibly trigger steep increases in Medicare premiums.

Financial professionals say this is a good moment for people seeking to convert existing retirement accounts from pretax to Roth, because of historically low income tax rates that are set to readjust higher after 2025 unless Congress intervenes. In addition, Roth accounts can save heirs from getting hit with big tax bills from inherited IRAs.

“That does make these next couple of years potentially a little bit more advantageous,” said Matt Hylland, a partner at Arnold & Mote Wealth Management in Hiawatha, Iowa.

He and others in the field say there are several good arguments for having a bucket of tax-free money available in retirement.

First is just the uncertainty of where tax rates will be in the future. The Tax Cuts and Jobs Act of 2017 lowered individual tax rates, but those cuts were temporary and are set to expire at the end of next year. Unless lawmakers act, the marginal tax rate for the highest earners could revert to roughly 40%.

Jeremy Eppley, founder of Silverstone Financial in Owings Mills, Maryland, said he believes that the high national debt will prompt the government to raise taxes in the future. “It’s unlikely that, long term, taxes will remain this low,” he said.

Retirees or people approaching retirement who have accumulated large balances in accounts with pretax contributions could find themselves in an unexpectedly high tax bracket once they need to begin taking required minimum distributions at the age of 72 (age 73 for those who were 72 or younger in 2024), especially if they also have other taxable income streams, such as a pension.

John Moore, a retired engineer and a client of Hylland’s who lives in Cedar Rapids, Iowa, said he worried that financial setbacks and the Great Recession had left him without enough of a retirement nest egg.

“I knew if I was going to have a hope at retirement, I was going to have to save like crazy,” he said.

But Moore, 65, said he hadn’t considered the ramifications of higher taxable income when he will have to begin taking those required minimum distributions. “As soon as I saw the math, it didn’t take rocket science to figure out,” he said.

He is now undertaking a multiyear process of converting some of his pretax retirement savings to a Roth.

Hylland said this is a common oversight among people just entering retirement. A lot of people see those first few years of retirement and say, ‘This is great. I’m at a lower tax rate.’ It’s later on when this is really going to start rearing its head,” he said.

People who are still working might be able to make Roth contributions through their employer’s 401(k) plan. According to Vanguard’s 2024 How America Saves report, 82% of employer 401(k) plans offer a Roth option. Unlike Roth IRAs, which have income restrictions, any eligible worker can contribute to a Roth 401(k). Another option for high-income earners is undertaking a Roth conversion.

Individuals working part time or in their first few years of retirement — especially if they are living off savings and not yet drawing Social Security or taking retirement account withdrawals — are in a good position to undertake Roth conversions because having less taxable income puts them in a lower tax bracket.

Money converted to a Roth account is counted as income and taxed at ordinary income rates. Financial advisers say they work to “fill up” brackets without triggering a jump to the next marginal tax bracket. For instance, a single filer earning $150,000 in 2024 could convert up to $41,950 from a traditional retirement account to a Roth account without pushing their income above the $191,950 threshold for the 24% tax bracket.

In addition to income tax rates, there are other income-driven programs and credits that people can put at risk if they convert too much money to a Roth — and raise their taxable income — in any given year. People could lose tax credits for marketplace health care plan premiums, for instance, or become ineligible for income-based student loan repayment programs. For parents with children in or about to be in college, a bump in income triggered by a Roth conversion could hurt financial aid eligibility. For older retirees already drawing Social Security and on Medicare, a jump in income could throw off their tax calculations and trigger higher Medicare premiums.

There’s also the matter of the tax bill on those conversions. Advisers recommend against withdrawing more than the amount you want to convert to cover the taxes, since money not rolled over into a qualified retirement account is treated as a withdrawal. For those younger than 59 1/2, this means triggering a 10% early withdrawal penalty in addition to the ordinary income tax due on that money.

Advisers say they encourage people to start thinking about conversions early, in order to give themselves enough time to avoid triggering any of these events by converting funds little by little.

“If we have enough of a runway, it can be a small amount per year,” said Luis Rosa, founder of Las Vegas-based Build a Better Financial Future. “If you have at least five years or more, that’s ideal,” he said, because it gives investors the flexibility to decide how and when they want to pay taxes.

“Do you want to pay taxes on the seed or the harvest?” he said.

This article originally appeared in The New York Times .