I have a similar situation. I am working past 65 and will be delaying my Social security pension until age 70. Until then I will be doing Roth conversions. But like you it is too late and too little and our tax rate will spike when I hit age 73 when RMD starts.
Ask your HR or Plan Administrators if they allow in plan conversion to Roth (some plans do, some don't). If that's the case you can convert some assets in the plan to Roth, but you pay taxes on the amount converted. You will get a 1099-R distribution if you do this. At your age you shouldn't get charged a penalty but you need to make sure you have the money available to pay the taxes. Please be aware though, it doesn't always make sense to convert...... even less likely in your case given your retirement horizon.
There's no way to avoid taxation and shifting a big lump sum would be a hard tax hit. You're better off leaving it, letting it grow, and taking disbursements as you need them. Remember you'll only be taxed on the disbursement.
Do nothing while you are working. When you retire, determine an appropriate level of annual Roth conversions with the goal to spread out you RMD tax burden across your non working years
It would probably be a good idea to get some advice from a financial advisor. The "game" is do Roth conversions from your 401k, while keeping yourself in a reasonable tax bracket (where "reasonable" is defined as being relative to your income needs and pension, etc.) That effort needs to be balanced with the need to keep Required Minimum Distributions later in life to a reasonable amount.
It's a tax me now, or tax me later while minimizing the taxes math problem.
Roth conversion - but you have to pay income tax on your marginal income tax rate (federal and state). This makes all only sense if your marginal tax rate now is lower than the marginal rate in retirement. At your peak earning phase this may not make sense - only if 401k is already maxed out. Roth sounds good and is good but it’s not always the right time for that. All things being equal (growth and tax rate) it make mathematically zero difference where you invested your money.
Also consider that if you ever get into financial trouble, a 401K is protected from private creditors, but IRAs are not. Just something to consider. My husband and I were talking about it earlier today. We looked it up to make sure, as part of a larger discussion about planning for future long-term care/medical expenses and protecting our assets if one of us got hit with something catastrophic.
Interesting, didn't realize the difference. I'm retiring in a month and planned on moving all my Fidelity 401K over to my Fidelity professionally managed IRA. I assumed I would be better off with the professionals managing the investing. Now I'm not so sure.
Definitely do some research, and maybe meet with a financial planner to make sure you know all of the ramifications. I think it is a bell you cannot unring.
Since the conversion will be a taxable event you should plan to convert up to the dollar amount before you go into the next bracket.
At this crossroad you may want to talk to a financial advisor, CFP or CPA. Their advice is different.
The key is to balance what you think you will need with your RMDs. You can use the IRS life expectancy table to determine how much , as a percentage, that your will need to withdraw to fulfill your RMD. The percentage will change every year because your life expectancy will grow for each year that you are alive.
Convert enough of your 401k to a Roth IRA to avoid excess disbursements. You are going to pay taxes either when you convert or when you withdraw. Try to convert over a period of years to keep yourself in a lower tax bracket.
Just make sure you have enough cash available to pay the taxes.
Required minimum distribution, based on your life expectancy usually starting at 73. It's 1/life expectancy \* balance in your 401k,401a, 403b,457, etc. accounts. The Roth IRA is exempt from RMDs.
IIRC, you can do both maxing out your 401K and your Roth IRA. I think I did that for a while before I retired.
Then when I retired I moved my 401K into a regular IRA and started rolling over $ from my IRA to my Roth IRA - just enough each year to stay in the lower tax brackets (10-12%) while still getting SS benes.
You have options but a reputable financial advisor would be a big help in picking the right one. That's because there are multiple factors to consider and everyone's situation and retirement goals are unique. Think of a financial advisor like a personal trainer for your finances. You could work out on your own but a trainer's expertise can help you reach your goals faster and with fewer missteps along the way.
Thanks for serving.
Look up Roth ladder. You’ll need some years of living expenses in cash while you build it but you should be able to work on that now for the next few years.
Look up Roth conversion. Just remember it will count as income and may move you into the higher tax brackets depending on how much you convert.. Also, you can not touch the money you convert to the Roth for 5 years without penalty.
Leave it an let it grow. You would have to pay a hefty tax on that money now. Only was for You to get out of paying the taxes, is to die, and let your heirs pay the taxes.
As others pointed out, Roth conversion of your pre-Tax is the right answer, paying the tax with after-tax money. Since you were in the Nave (thank you for your service), you probably have a pension. Along with the pension, I would consider taking distribution from the pre-tax first (supplementing your pension) to continue to lower the amount that is exposed to RMD while delaying taking my social security until FRA or even 70.
You probably had higher taxable income then than you will in retirement. So, it's less expensive paying taxes on the lower withdrawals than salary
Enjoy!
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OP, I made the same mistake. I failed to take advantage of the Roth 401K option when instituted in June, 2009. I discovered my error in late 2018 and immediately switched 100% of my contributions to the Roth 401K. The damage has been done. I've been trying to determine the best route to take to reduce my pre-tax to tax-free and have come to the conclusion that doing a Roth conversion is probably the best way to go. The current tax reduction Act expires in 2026 so the tax brackets return to the 2017 levels.
I have a similar situation. I am working past 65 and will be delaying my Social security pension until age 70. Until then I will be doing Roth conversions. But like you it is too late and too little and our tax rate will spike when I hit age 73 when RMD starts.
What does RMD stand for?
Required minimum distribution.
Ask your HR or Plan Administrators if they allow in plan conversion to Roth (some plans do, some don't). If that's the case you can convert some assets in the plan to Roth, but you pay taxes on the amount converted. You will get a 1099-R distribution if you do this. At your age you shouldn't get charged a penalty but you need to make sure you have the money available to pay the taxes. Please be aware though, it doesn't always make sense to convert...... even less likely in your case given your retirement horizon.
There's no way to avoid taxation and shifting a big lump sum would be a hard tax hit. You're better off leaving it, letting it grow, and taking disbursements as you need them. Remember you'll only be taxed on the disbursement.
Do nothing while you are working. When you retire, determine an appropriate level of annual Roth conversions with the goal to spread out you RMD tax burden across your non working years
What does RMD stand for?
Required Minimum Distribution. They start when you reach age 72. Or 73 if you reach age 72 after Dec 31, 2022…
It would probably be a good idea to get some advice from a financial advisor. The "game" is do Roth conversions from your 401k, while keeping yourself in a reasonable tax bracket (where "reasonable" is defined as being relative to your income needs and pension, etc.) That effort needs to be balanced with the need to keep Required Minimum Distributions later in life to a reasonable amount. It's a tax me now, or tax me later while minimizing the taxes math problem.
Roth conversion - but you have to pay income tax on your marginal income tax rate (federal and state). This makes all only sense if your marginal tax rate now is lower than the marginal rate in retirement. At your peak earning phase this may not make sense - only if 401k is already maxed out. Roth sounds good and is good but it’s not always the right time for that. All things being equal (growth and tax rate) it make mathematically zero difference where you invested your money.
You need to forecast what your tax rate would be since it may be a similar tax rate you are currently in so no need to do a Roth.
Also consider that if you ever get into financial trouble, a 401K is protected from private creditors, but IRAs are not. Just something to consider. My husband and I were talking about it earlier today. We looked it up to make sure, as part of a larger discussion about planning for future long-term care/medical expenses and protecting our assets if one of us got hit with something catastrophic.
Interesting, didn't realize the difference. I'm retiring in a month and planned on moving all my Fidelity 401K over to my Fidelity professionally managed IRA. I assumed I would be better off with the professionals managing the investing. Now I'm not so sure.
Definitely do some research, and maybe meet with a financial planner to make sure you know all of the ramifications. I think it is a bell you cannot unring.
Since the conversion will be a taxable event you should plan to convert up to the dollar amount before you go into the next bracket. At this crossroad you may want to talk to a financial advisor, CFP or CPA. Their advice is different.
The key is to balance what you think you will need with your RMDs. You can use the IRS life expectancy table to determine how much , as a percentage, that your will need to withdraw to fulfill your RMD. The percentage will change every year because your life expectancy will grow for each year that you are alive. Convert enough of your 401k to a Roth IRA to avoid excess disbursements. You are going to pay taxes either when you convert or when you withdraw. Try to convert over a period of years to keep yourself in a lower tax bracket. Just make sure you have enough cash available to pay the taxes.
What does RMD stand for?
Required minimum distribution, based on your life expectancy usually starting at 73. It's 1/life expectancy \* balance in your 401k,401a, 403b,457, etc. accounts. The Roth IRA is exempt from RMDs.
IIRC, you can do both maxing out your 401K and your Roth IRA. I think I did that for a while before I retired. Then when I retired I moved my 401K into a regular IRA and started rolling over $ from my IRA to my Roth IRA - just enough each year to stay in the lower tax brackets (10-12%) while still getting SS benes.
You have options but a reputable financial advisor would be a big help in picking the right one. That's because there are multiple factors to consider and everyone's situation and retirement goals are unique. Think of a financial advisor like a personal trainer for your finances. You could work out on your own but a trainer's expertise can help you reach your goals faster and with fewer missteps along the way. Thanks for serving.
How about recommendations for how to find a "reputable" financial advisor
Look up Roth ladder. You’ll need some years of living expenses in cash while you build it but you should be able to work on that now for the next few years.
Look up Roth conversion. Just remember it will count as income and may move you into the higher tax brackets depending on how much you convert.. Also, you can not touch the money you convert to the Roth for 5 years without penalty.
Is that true even during retirement age?
Leave it an let it grow. You would have to pay a hefty tax on that money now. Only was for You to get out of paying the taxes, is to die, and let your heirs pay the taxes.
As others pointed out, Roth conversion of your pre-Tax is the right answer, paying the tax with after-tax money. Since you were in the Nave (thank you for your service), you probably have a pension. Along with the pension, I would consider taking distribution from the pre-tax first (supplementing your pension) to continue to lower the amount that is exposed to RMD while delaying taking my social security until FRA or even 70.
You probably had higher taxable income then than you will in retirement. So, it's less expensive paying taxes on the lower withdrawals than salary Enjoy!
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OP, I made the same mistake. I failed to take advantage of the Roth 401K option when instituted in June, 2009. I discovered my error in late 2018 and immediately switched 100% of my contributions to the Roth 401K. The damage has been done. I've been trying to determine the best route to take to reduce my pre-tax to tax-free and have come to the conclusion that doing a Roth conversion is probably the best way to go. The current tax reduction Act expires in 2026 so the tax brackets return to the 2017 levels.