Financial experts say aging US seniors should consider this 1 move with their 401(k) — it could save them thousands in retirement

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Take Brent Ehmke, a 72-year-old retired aerospace executive, for example. According to a recent article by The Wall Street Journal, the Plano, Texas resident realized he would soon have to take over $100,000 each year in required minimum distributions (RMDs) from his tax-deferred retirement account. This in addition to his other income from investments, Social Security, pension and consulting would result in a hefty tax bill.

“I’m asking myself, ‘Holy cow! Did I make a mistake? Did I wait too long?’” he said.

Is a Roth conversion right for you?

A Roth IRA is funded with post-tax dollars and you can enjoy tax-free withdrawals later. With a traditional IRA or 401(k), you fund the account with pre-tax dollars and pay taxes when you take distributions.

If you have adequate retirement income like Ehmke, doing a Roth IRA conversion of your 401(k) or traditional IRA might be a smart money move. Once you reach age 72 (73 if you reach age 72 after Dec. 31, 2022), you must take RMDs from your tax-deferred retirement account.

Yes, it does seem counterintuitive, paying taxes on distributions you’re not using just yet. When you roll over or transfer some of your funds from pre-tax dollars to a Roth IRA account, conversion rules mean that you will owe taxes. The amount you’ll pay is generally based on the amount you converted and where you fall on the income tax bracket.

But there are benefits since Roth IRAs don’t have RMD requirements while you’re alive and this could save you a significant amount on taxes.

Read more: Jeff Bezos and Oprah Winfrey invest in this asset to keep their wealth safe — you may want to do the same in 2024

Say you’re retired and the RMD amount plus your income coming in, whether it’s from a part-time job or dividends from other investments, is much more than what you need. Roth conversions could prevent you from being pushed into a higher tax bracket in the future. As the WSJ article notes, avoiding RMDs and keeping your income lower this way can also help prevent your Medicare premium rising or the 3.8% net investment-income surtax being triggered.

When you do a Roth conversion, you could find yourself in a higher tax bracket that year or see your Medicare premium rise. In order to avoid this, you could strategically make small conversions over time. As the WSJ article notes, “In general, Roth IRA conversions make sense if the saver’s tax rate on the converted amount is lower than what the tax rate would be on future withdrawals.”

Also, if you want to be able to leave money to your children or heirs after you pass tax-free, Roth conversions could give you this opportunity to do so.

Other key considerations

This approach suits higher-income earners who don’t need all of their RMDs or those who have low expenses in retirement. Seniors should also think of how they plan to pay for long-term care since those costs are tax deductible so paying for them out of a traditional IRA account may be better.

If you plan on taking distributions from your Roth IRAs, remember the five-year period guideline. Earnings are only tax-free if it’s been at least five years since you first contributed to the account. In other words, consider Roth conversions if you know you won’t need the money for at least five years.

Whatever you choose, understand that you can’t undo a Roth conversion. It’s also possible to have funds between your traditional and Roth accounts if it makes sense for your financial situation.