When most Americans retire, they often miss a gap of several years during which they could maximize their tax savings by converting their retirement savings into a Roth account. Let's see why that happens -- and how retirees could still jump in as long as they're under the age of 73.
What is the "Roth Conversion Window"?
The average American retires at 62, according to a 2024 MassMutual study. However, most retirees don't need to withdraw required minimum distributions (RMDs) from their tax-deferred retirement accounts until they're 73.
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Americans can also choose to start receiving Social Security checks at age 62, but their monthly benefit will be about 30% lower than if they wait until the full retirement age of 67. Therefore, retirees who still have plenty of cash will probably wait until then to start cashing in their checks.
So if you retire at 62, don't take Social Security until 67, and don't plan to start withdrawing your retirement savings until 73, you'll have a gap of over a decade during which you'll receive a lower annual income. Therefore, you should drop into a lower tax bracket than the one you were in during your working years. That period is the "Roth Conversion Window" -- because it's a perfect time to directly convert your Traditional IRA/401(k) into a Roth IRA.
Why is it important to take advantage of that window?
One key difference between a Traditional IRA and a Roth IRA is when you pay taxes. In a Traditional IRA, you're usually taxed when the funds are withdrawn. In a Roth IRA, your contributions are made in after-tax dollars but never taxed again -- as long as you're over the age of 59 1/2 or have kept the account open for at least five years.
If you directly convert a Traditional IRA into a Roth IRA, you don't need to withdraw funds from the former to deposit into the latter. So if you retire at 62, immediately convert your Traditional IRA into a Roth IRA, you'll only be taxed once as the assets shift into the Roth IRA.
All of those assets (excluding non-deductible contributions) being transferred over would count as your ordinary income for the year. But if you're retired and not collecting Social Security or withdrawing RMDs yet, your tax bracket should be much lower. Therefore, that window is the best time to convert a Traditional IRA to a Roth IRA at the lowest possible tax rate.
The other key difference is that, unlike Traditional IRAs -- which force retirees to start withdrawing taxable RMDs at age 73 -- Roth IRAs don't have any RMDs at all. So once those assets are deposited in your Roth IRA, you can withdraw them at any time without fretting over taxes -- since they've already been paid at a lower rate during the Roth Conversion Window.
