The $183,000 RMD Shock: Why Roth Conversions Can Be Risky

An older couple look shocked as they look at their laptop screen at the dining room table.

If you're an American in your mid-70s, your retirement accounts are both a comfort and a challenge.

After decades of work, diligent saving and consistent investing, your balance might climb into the millions. Yet, since you turned 72 or 73 (depending on the year you were born), you've had to take required minimum distributions (RMDs) from your IRA.

Say you're now 75 with about $4.5 million in traditional IRA funds, and you receive a notice that your RMD will be just under $183,000. The withdrawal is mandatory. More unsettling is that every dollar is taxable as ordinary income.

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That kind of bill sends many retirees searching for alternatives. Around golf courses, dinner tables and online forums, one suggestion rises above the rest: Just convert to a Roth.

The idea sounds simple. Move the money, pay taxes now, then enjoy tax-free growth and withdrawals forever.

At age 75, though, the financial math often tells a different story.

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The author of this article is a participant in Kiplinger's Adviser Intel program, a curated network of trusted financial professionals who share expert insights on wealth building and preservation. Contributors, including fiduciary financial planners, wealth managers, CEOs and attorneys, provide actionable advice about retirement planning, estate planning, tax strategies and more. Experts are invited to contribute and do not pay to be included, so you can trust their advice is honest and valuable.

The appeal of the Roth

The Roth IRA is a favorite in financial planning because it offers:

No RMDs
Tax-free compounding for as long as the account exists
Tax-free inheritance for your beneficiaries

Placed beside a looming six-figure tax obligation, those benefits feel irresistible. But the reality is that the promise of a Roth is highly dependent on timing, and timing is when older retirees run into problems.

Why? Because they have a shortened time horizon. The logic of converting to a Roth rests on pay now, save later, and that only works if you have enough years for tax-free growth to overcome the upfront tax.

At 75, your runway is shorter. Even with favorable markets, the break-even period to recoup the conversion tax can stretch beyond a decade. Here are several troubling factors:

RMDs do not disappear. Unless you convert the entire IRA, you still owe annual distributions on whatever remains. That $183,000 withdrawal cannot be skipped, and converting it in pieces does not erase it.

Heavy tax consequences. Converting $1 million might sound modest next to a $4.5 million account, but it can instantly create a tax bill of well over $350,000.

The added income can also trigger higher Medicare premiums, increase the portion of Social Security that is taxed and expose investment income to additional levies.

Estate planning contradictions. If charitable gifts are part of your legacy plan, paying upfront taxes to create Roth dollars is unnecessary, since charities can receive traditional IRA funds without tax.

For heirs, several coordinated strategies might outperform a costly conversion.

The cash drain. If you don't have large funds outside the IRA, you'll likely pay the conversion tax from the IRA itself. That reduces the account, cuts potential growth and weakens the very advantage that makes the Roth attractive.

Say an adviser suggests you convert $1 million to a Roth this year. You could be writing the IRS a check exceeding $350,000.

Instead, you might explore staged withdrawals across tax brackets, qualified charitable distributions that offset RMDs and coordinated updates to your estate documents. That approach can create significant tax relief without sacrificing long-term value.

Smarter alternatives

Professionals often point you toward strategies that balance flexibility and taxes. These include:

RMD planning that spreads withdrawals to avoid big spikes
Qualified charitable distributions that send funds directly to nonprofits, reducing taxable income while satisfying RMD rules
Bracket management to time withdrawals and stay in lower tax bands
Coordinated estate design to reduce your family's overall tax burden

The bigger picture

Roth conversions are promoted so aggressively that many retirees assume they're universally beneficial.

The truth is more nuanced, and conversions can make sense for younger workers or for people in their 50s and 60s. For wealthy retirees in their mid-70s, the cost often outweighs the benefit.

The real question is not whether you should convert, but whether a conversion truly reduces your lifetime tax burden. For many at age 75, the answer is no.

Ezra Byer contributed to this article.

The appearances in Kiplinger were obtained through a PR program. The columnist received assistance from a public relations firm in preparing this piece for submission to Kiplinger.com. Kiplinger was not compensated in any way.

Disclaimer

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

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Mark Kennedy is the founder and president of Kennedy Wealth Management LLC, a Registered Investment Advisor based in Calabasas, California, since 2008. With more than two decades in insurance and estate financial planning, Mark focuses on tax strategies, retirement income and wealth transfer. He has helped high-net-worth families and business owners preserve wealth, reduce taxes and pass more to loved ones instead of the IRS.