A $300,000-earning couple retiring at 62 can save $145,000 in federal taxes by converting pre-tax 401(k) funds to Roth IRAs.
A couple earning $300,000 annually and retiring at 62 can reduce federal taxes by $145,000 by converting $150,000 yearly from pre-tax 401(k) accounts to Roth IRAs over eight years. The strategy leverages a 13-year window before required minimum distributions (RMDs) begin at age 75, dropping their tax bracket from 24% to 12% post-retirement.
While working, the couple faces a 24% federal tax rate on conversions, but retirement shifts their taxable income into the 12% bracket. Converting $1.6 million in pre-tax savings costs $216,000 in taxes upfront, compared to $360,000 if left to RMDs. Taxes must be paid from a taxable brokerage account, and conversions should halt two years before Medicare eligibility to avoid IRMAA surcharges.
The approach targets the gap between retirement and RMDs, maximizing tax efficiency for high-net-worth individuals delaying Social Security until age 70.