Delaying 401(k) to Roth conversions until retirement may cut federal tax costs by over 50% for high earners.
Converting a $200,000 401(k) to a Roth IRA during peak earning years at a 30% tax rate costs $50,000 in federal taxes. Waiting until retirement, when tax rates may drop to 15%, reduces the tax bill to $24,000, saving $26,000.
High-income earners face elevated tax brackets that amplify conversion costs. Required minimum distributions (RMDs) at age 73 can further inflate taxable income, complicating withdrawal strategies. Advisors note that misjudging tax brackets by even one level can result in unnecessary tax payments.
The decision hinges on projected retirement income and tax rates. Those expecting lower post-retirement earnings may benefit from deferring conversions, while others facing rising RMDs could find early conversions advantageous.