Should I Convert 10% of My 401(k) to a Roth IRA Each Year to Reduce Taxes and RMDs?

A Roth IRA offers tax-free growth and no required minimum distributions (RMDs). However, converting assets comes with a cost: you pay income taxes on the full value of the conversion. For instance, converting $100,000 from a 401(k) to a Roth IRA raises your taxable income by that amount, requiring cash to pay the resulting tax increase.

Converting 10% of a 401(k) annually could help manage taxes, but it does not completely avoid them. While Roth withdrawals in retirement are tax-free and help heirs avoid taxes, the upfront tax payment is significant. Assets must remain in a Roth IRA for five years before withdrawals, which can be problematic for those nearing retirement.

Converting a 401(k) to a Roth IRA eliminates RMDs, as Roth withdrawals are tax-free. However, the decision to convert depends on individual circumstances. Staggering conversions can help keep annual income in lower tax brackets, minimizing the tax impact. Consulting a financial advisor is recommended to tailor the strategy to specific needs and goals.