How Higher Earners Over Age 50 Can Leverage Roth Conversions

Using a Limited Tax Bill Budget More Efficiently

Written by:

Elijah Dorf

Elijah HH Dorf is a Wealth Advisor and the Director of Financial Planning Services at Clearfront Advisory. He is based in the firm’s Boston office, where he develops and executes tailored financial strategies aligned with clients’ values, objectives, and timelines, and is responsible for leading the firm’s comprehensive financial planning process for its clients.

Key Takeaways

• For many higher earners over age 50, new retirement catch-up contribution rules limit pre-tax savings options
• In some cases, Roth conversions can be leveraged to move significantly more assets into Roth accounts than Roth contributions
• When done strategically, Roth conversions can meaningfully increase long-term tax-free growth

For higher earners, retirement planning can be less about how much to save and more about how to allocate their dollars most effectively and efficiently.

Recent changes to 401(k) catch-up rules have made that tradeoff even clearer, particularly for employees over age 50 who are required to make catch-up contributions on a Roth basis.

The Constraint Many High Earners Face

Many high-income households already:

• Max out standard 401(k) contributions
• Have limited access to additional pre-tax savings vehicles
• Face higher marginal tax rates on incremental income

As a result, most planning decisions are constrained by a common practical reality: there is only so much after-tax cash each year available to pay taxes today.

Using Roth Conversions More Intentionally

Instead of using those after-tax dollars exclusively for Roth contributions, some high earners may be able to reposition significantly more money into Roth accounts by using the same tax dollars to fund a Roth conversion.

The key distinction is this:

• A Roth contribution adds new after-tax savings, subject to contribution limits
• A Roth conversion moves existing pre-tax assets into a Roth account, with no dollar limit, aside from the tax cost of performing the conversion

Example: Roth Contribution Versus Roth Conversion

Consider a hypothetical example with John, age 50:

• Household taxable income is $450,000
• Tax filing status is married filing jointly
• 32% marginal tax bracket
• Has $600,000 in a Traditional IRA
• Already maxes out his standard 401(k) contribution of $24,500

Roth Contribution

John is eligible for an $8,000 catch-up contribution, which must now be made as a Roth contribution.

One approach is to simply contribute the $8,000 directly to a Roth 401(k).

Roth Conversion

Another option is to leverage that same $8,000 to pay the tax on a Roth conversion.

At a 32% marginal tax rate:

• $8,000 of taxes paid can support a Roth conversion of approximately $25,000
• For the same tax cost as making a Roth contribution, John can reposition more than three times as much money into a Roth account by performing a Roth conversion

This assumes the taxes are paid with funds outside the IRA, rather than withheld from the conversion itself.

Even Greater Potential in the Super Catch-Up Years

The opportunity can be even larger for individuals ages 60–63, who are eligible for the higher super catch-up contribution of up to $11,250.

If John were instead age 60 and remained in the same tax bracket as in the previous example, that amount could leverage a Roth conversion of roughly $35,000, compared to contributing $11,250 directly to a Roth account.

Long-Term Impact

Going back to the first example with John, if $25,000 is converted at age 50 and grows at a 6% annual rate, it could grow to approximately $257,000 of tax-free assets over the course of 40 years. Comparatively, contributing the $8,000 under those same conditions would only grow to $82,285 of tax-free assets.

Even after adjusting for future inflation, the real purchasing power remains meaningful.

Importantly, without using any other planning strategies, John would likely be taxed on that money regardless of whether he does a contribution, conversion, or nothing at all. The decision is whether they fund a smaller Roth contribution or support a much larger Roth conversion.

Important Tax Considerations

This type of strategy isn’t appropriate in every situation. The converted amount increases taxable income and can impact:

• Marginal tax brackets
• Medicare IRMAA surcharges
• Net Investment Income Tax
• Other income-based phaseouts

The IRA pro-rata rule may also affect the taxation of conversions. For these reasons, Roth conversion strategies should always be evaluated as part of a broader, coordinated tax plan.

Summary

Evaluating how to use a limited tax bill budget can provide a powerful opportunity for greater lifetime tax efficiency, especially for families with large pre-tax retirement account balances, but they’re just one element of a broader retirement and tax strategy.

Good financial planning isn’t a “one size fits all” experience. If you’re thinking about how this applies to your own situation, you’re already at the point where having a conversation makes sense. That’s where partnering with our practice begins: