IRA conversion to Roth IRA

[mistark]

I am  65 years old and retired with only showing 50k yearly income from investments. I have around 2 million in IRA and 401k accounts which I have not touched but want to convert them to Roth IRA by the time I am age 73. I currently am not collecting social security and will wait till age 70. What amounts should I convert yearly with the least tax implications. I will be paying the taxes on the conversions from my cash assets that I have. Thanks

[K M W]

Calculating the "right" amount to convert from pre-tax retirement accounts to after-tax retirement accounts can be a tricky process!  Additionally, the "right" amount for one person may not be the "right" amount for another.  I would recommend that you play around with various options to determine what is best for you. Let me explain a little further:

You mentioned that you are 65 years old, not planning on taking Social Security until age 70, and your only income is about $50,000 of investment income.  So, for you, the answer is going to depend on what tax bracket you want to stay within when converting from pre-tax to after-tax retirement funds, as any amounts you move will be taxed at your ordinary income tax rates. 

For the filing status of single, for 2024 the tax brackets are:

If taxable income is over:	but not over:	the tax is:
$0	$11,600	10% of the amount over $0
$11,600	$47,150	$1,160 plus 12% of the amount over $11,600
$47,150	$100,525	$5,426 plus 22% of the amount over $47,150
$100,525	$191,950	$17,169 plus 24% of the amount over $100,525
$191,950	$243,725	$39,111 plus 32% of the amount over $191,950
$243,725	$609,350	$55,679 plus 35% of the amount over $243,725
$609,350	no limit	$183,647 plus 37% of the amount over $609,350

So, if you wanted to stay under the 32% rate, then you would want your taxable income to be under $191,950. However, if you were okay with paying tax on part of the funds at a 32% rate, then you would want your taxable income to be under $243,725. 

Of course, you do have to factor in your existing income as well as the effect of taking either the standard or itemized deductions.  With $50,000 of investment income, and assuming you are taking the standard deduction in 2024 of $16,150 (standard deduction of $14,600 for single, plus additional $1,550 for being 65 or older), you will already be starting off with taxable income of $33,850, so don't forget to factor that existing income into the calculation!

One final note that may impact your scenario is that you mentioned that your current annual income is investment income - depending on the type of investment income you have, it may be taxed at your ordinary income tax rates (i.e. if it were rental property income, short term capital gains, or ordinary dividends), or if your investment income includes items such as long term capital gains and/or qualified dividends, those will be taxed at a lower tax rate. 

[dmertz]

The numbers that K M W has provided to you show that it will be impossible to convert the entire $2M to Roth by age 73 without some ate 32%.  Staying out of the 32% tax bracket would require converting no more than around $150k per year.  Pushing AGI beyond $200k will also trigger Net Investment tax.

Nothing prevents you from converting similar amounts in and after the year that you reach age 73 as long as you complete your RMD first.

Don't forget to consider state tax rates as well and as well as any effect that increases in AGI have on the taxability of Social Security benefits and, if you have Medicare Part B or D, Medicare IRMAA.