Dear MarketWatch,
I’m 64 and my husband is 62. We plan to work until he is at least 65, so three or four more years. We have about $1 million total in various accounts, but my own IRA has $400,000 in it. Should I move it to a Roth IRA or is it too late at this stage? I’m also trying to pay down our mortgage. Our house is worth about $650,000 and the mortgage is now $200,000, so when we retire we’ll be debt free and can sell the house and go.
Thanks for any information you can give.
See: Why I won’t do a Roth IRA conversion – even if this is the last chance
Dear reader,
Congrats on being so close to retirement and having $1 million saved – that’s such a great accomplishment. You bring up two very important retirement points so I’ll just dive right in.
As for whether or not you should move your IRA into a Roth account, the answer is: It depends. Traditional and Roth IRAs both have their own benefits, but you have to do a little estimating at this point to determine whether it’s worth it or not for you. It is certainly not too late to contribute or convert money to a Roth account, but think about your current and future tax liabilities.
For example, since you’re both still working: do you file married filing jointly and are in a higher tax bracket now than you will be at retirement? Even if you’re married filing separately, how does your current tax rate compare to what you expect it to be in retirement? (I know this can be hard to estimate, especially with the fact that the government may change tax rates by the time you retire, but think of the big picture as best you can.)
Check out MarketWatch’s column “Retirement Hacks” for actionable pieces of advice for your own retirement savings journey
If you’re in a higher tax bracket now than you will be in retirement, you might want to hold off on converting to a Roth IRA, or you may want to do some detailed calculations as to how much you can convert without pushing yourself into a higher tax bracket. The reason being, when you convert to a Roth, you’re paying the taxes on the conversion at that moment. If you’re in a higher tax bracket, you’ll pay more in taxes as a result.
Also take into consideration when you’ll tap into that money. You’re both older than 59 ½ years old now, which means you can withdraw from your traditional account without tax penalties. There’s no age limit for converting money to a Roth, but you will be held to a five-year rule for your conversions. That means if you were to convert money this year, you’d have to wait five years to be able to withdraw any earnings from your converted Roth IRA assets without paying the taxes on that distribution. Let me be clear – what you convert will be available tax-free, but any earnings on that money (which would be last in the order of withdrawals) would be subject to taxes.
Comparatively with your traditional IRA, you’ll just pay the tax on the entire withdrawal at the time of distribution.
Now onto the mortgage. I know you didn’t necessarily ask about if you should pay off the mortgage but I wanted to touch on that for a moment. This question of whether or when to pay off a mortgage before retirement is one I hear a lot of retirees ask.
It all comes down to your comfort level, of course, but remember the financial pros and cons in this scenario. For example, if you have a reasonable and affordable mortgage payment and in retirement you could continue to pay that bill without any issue, you might want to do so. This way, you can keep stashing excess cash flow into your retirement accounts.
Also see: I’m retired, my wife isn’t – how should we pay off our $60,000 mortgage before she retires?
Keep in mind, you will need as much money in retirement as you can possibly have. To have $1 million is certainly a wonderful feat, but consider that the average couple retiring at 65 can expect to spend $300,000 in retirement on healthcare alone, and that doesn’t include long-term care costs, according to Fidelity Investments. You may also need some more money in retirement for an emergency, or a bucket list goal, and you’ll be living on a fixed income which could cause you some undue stress.
So if you’re able to save as much cash as you can between now and retirement and keep paying your mortgage every month, you may want to do so, especially if it is a fixed mortgage payment because that means it will stay the same bill now, in a year, or in 10. If you were to take money out of your retirement accounts to pay off the mortgage, you’re cutting into your future nest egg, and it will take a long time to recover that loss.
Also, if you are able to afford the bill, when you do eventually pay it off in retirement you have extra money to save – or spend – in retirement later on. That’s like getting a raise!
I wish you the best of luck.
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The focus on the adult children's taxes sounds noble, but the bigger question is what works best for the givers.
Alessandra Malito is a retirement reporter based in New York. She is also a Chartered Financial Consultant. You can follow her on Twitter @malito_ali
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