Imagine retiring at 62 with $900,000 in a traditional 401(k). You also have cash or investments in a taxable brokerage account that can cover your immediate living expenses. Because you are not taking much money from your 401(k), your current taxable income may be relatively low.
That can feel like a sensible approach: leave retirement savings invested and avoid creating unnecessary taxable income. But there is another side to consider. Money in a traditional 401(k) generally has not yet been taxed at the federal level. Withdrawals are usually taxable as ordinary income, and required minimum distributions (RMDs) can eventually make you take money out whether or not you need it for spending.
The planning question is not simply whether to withdraw money now or later. It is whether a carefully sized withdrawal or a Roth conversion during lower-income years could improve your overall after-tax retirement position.
1. Why a $900,000 traditional 401(k) is not the same as $900,000 in spendable wealth
A traditional 401(k) is generally funded with pretax contributions, and investment growth is typically tax-deferred. Tax is usually due when money is distributed. That means the account statement does not tell the whole story about how much money you will ultimately have available to spend.
For example, two retirees might each have $900,000 in retirement assets, but one may hold most of it in a traditional 401(k), while the other has a larger share in Roth accounts or taxable investments. Their future tax obligations and flexibility can differ significantly.
Traditional 401(k)
Pre-tax distributions are generally included in taxable income. The amount of tax depends on the individual's complete tax situation and the year in which money is distributed.
Roth account
Qualified Roth distributions can be tax-free. Converting pretax money to a Roth account generally creates taxable income in the conversion year.
This does not mean Roth money is always better or that traditional accounts are a mistake. Traditional contributions may have provided valuable tax deductions during working years. The question is how the account fits into your tax picture across retirement.
Learn more in our guide to how RMDs are taxed.
2. The years between retirement and required distributions
Some people retire before they claim Social Security or begin taking substantial distributions from their retirement accounts. If their living expenses are covered by cash, taxable investments, a pension, or other resources, they may temporarily have lower taxable income than they had while working.
That period can provide room to assess whether to recognize some retirement-account income earlier rather than leaving the entire tax bill to later years. However, the opportunity is personal: pension income, dividends, capital gains, health insurance subsidies, and other income can reduce the available room.
| Planning factor | Why it matters |
|---|---|
| Current taxable income | Helps show how much additional income might fit within a chosen tax bracket. |
| Future RMDs | Large tax-deferred balances can lead to larger required withdrawals in later years. |
| Social Security | Additional income can affect how much of a person's Social Security benefits is taxable. |
| Health insurance | Higher income before Medicare eligibility can affect eligibility for income-based marketplace premium assistance. |
| Medicare premiums | Income-related Medicare premium adjustments can apply based on income from an earlier tax year. |
| Expected future tax rates | A conversion may be less attractive if the tax rate paid now is higher than the rate expected on future withdrawals. |
For many people born in 1960 or later, current law generally sets the RMD starting age at 75. For some older birth cohorts, the starting age is 73 or an earlier rule may apply. The details depend on birth year, account type, and whether a workplace-plan still-working exception applies.
Check the applicable rules in our guide to when 401(k) RMDs start before assuming how many years remain in your planning window.
3. What a Roth conversion actually does
A Roth conversion moves eligible money from a traditional retirement account into a Roth account. The amount converted from pretax funds is generally included in taxable income for that year. Once converted, the money can potentially grow under Roth tax rules, and qualified Roth withdrawals can be tax-free.
The trade-off is straightforward but important: you pay tax on the converted amount now in exchange for potentially reducing future taxable distributions from that portion of your savings.
- Potential benefit: You may recognize income in a year when your tax rate is relatively low.
- Potential benefit: Reducing a traditional account balance may reduce future RMDs from that balance.
- Potential cost: The conversion increases current taxable income and may move some income into a higher tax bracket.
- Potential cost: Paying the conversion tax from cash or taxable investments means those dollars are no longer available to invest or spend elsewhere.
- Important restriction: A required minimum distribution itself generally cannot be rolled over or converted to a Roth IRA. Any RMD due must be handled separately.
Review the broader considerations in our 401(k) retirement planning guide before choosing a strategy.
4. Compare the strategies on an after-tax basis
Two common approaches are to leave the traditional 401(k) invested for as long as possible, or to recognize some taxable income earlier through planned withdrawals or Roth conversions. Neither strategy wins in every situation.
Strategy A: Wait
Use other resources for spending and leave the traditional 401(k) untouched or largely untouched. This can preserve current tax flexibility and keep more money invested, but the account may grow and later required distributions may be larger.
Strategy B: Recognize some income earlier
Take planned withdrawals or convert a portion to Roth during selected years. This may reduce future pretax balances, but creates a current tax bill and can affect other income-based thresholds.
A fair comparison should keep the assumptions consistent. Both strategies should fund the same after-tax spending, use the same investment-return and fee assumptions, and be evaluated over the same time horizon.
At the end of the projection, compare the after-tax value of all accounts—not just the Roth balance or the traditional 401(k) statement. A Roth account may look larger, but if the conversion tax was paid from investments that could otherwise have grown, that cost must also be counted.
6. Stress-test the plan before converting
Before making an irreversible tax decision, ask whether the recommendation still works if circumstances differ from the initial forecast.
- Compare the full plan at a chosen age.
Model total tax paid over time and the after-tax value of traditional, Roth, and taxable accounts—not just the balance of one account. - Test different future tax rates.
Run scenarios with lower, similar, and higher future tax rates. Include possible changes in income, filing status, and tax law. - Shorten the time horizon.
A conversion may have less time to make up for the tax paid upfront if retirement is shorter than expected. Model different lifespans without assuming a single outcome. - Include health and benefit costs.
Check possible effects on marketplace assistance before Medicare and income-related Medicare premiums later. - Change the investment assumptions.
Test lower returns, a market decline, or different fees. A strategy should not rely on optimistic growth to appear worthwhile.
7. A practical checklist before making a decision
- Confirm whether the account is a traditional 401(k), Roth 401(k), IRA, or a combination.
- Estimate your current-year taxable income before considering a conversion.
- Identify the tax bracket and other income thresholds relevant to your situation.
- Review when RMDs begin and how much they could be under different account-balance assumptions.
- Determine where the conversion tax would come from and what that money could otherwise earn.
- Consider Social Security taxation, health insurance assistance, and potential Medicare premium adjustments.
- Compare more than one conversion amount and include a scenario in which no conversion is made.
- Ask a qualified tax professional or fiduciary financial planner to review the assumptions before acting.
Frequently asked questions
Should a 62-year-old with $900,000 in a 401(k) convert it all to a Roth?
Not automatically. Converting the entire balance in one year could create a very large taxable-income increase. Some people may benefit from smaller conversions spread across multiple years, while others may be better off converting little or nothing. The decision requires individualized tax projections.
Do Roth conversions eliminate required minimum distributions?
Converting eligible traditional retirement money to a Roth account can reduce the balance subject to future RMDs in the traditional account. However, RMD rules still apply to many traditional accounts, and inherited Roth accounts can have distribution requirements. A conversion does not eliminate every RMD obligation.
Are Roth conversions taxable?
The pretax portion of a conversion is generally included in taxable income for the year of conversion. The precise treatment can depend on account basis and other circumstances. Confirm the tax consequences before proceeding.
Can a Roth conversion increase Medicare premiums?
It can. A conversion may increase modified adjusted gross income and can affect income-related Medicare premiums in a later year. The result depends on the applicable thresholds and individual circumstances.
What age do 401(k) RMDs begin?
The starting age depends on birth year and applicable plan rules. Under current law, people born in 1960 or later generally begin at 75, while some older groups generally begin at 73. Certain exceptions may apply, including for some people still working for the employer sponsoring their plan.
Is it always better to spend taxable savings before a 401(k)?
No. The right withdrawal order depends on tax rates, investment allocation, spending needs, healthcare costs, RMDs, and other income sources. Using taxable savings first may be appropriate in some situations, but it should be compared with other options.
Related 401(k) retirement guides
Use these guides to explore the rules and calculations behind retirement-account decisions.
Sources and further reading
- IRS: Required minimum distributions
- IRS: Roth comparison chart
- Medicare.gov: Medicare coverage and costs
- HealthCare.gov: Marketplace coverage and savings
This article is an original educational overview of retirement-tax planning concepts. It is not a reproduction of the linked news article and does not endorse a specific conversion amount or strategy.
This content is for educational purposes only and is not individualized tax, investment, legal, or financial advice. Roth conversions can have significant and sometimes irreversible tax consequences. Rules, income thresholds, contribution limits, and Medicare premiums can change. Verify current IRS guidance and consult qualified professionals who can review your complete financial circumstances before acting.
