Personal Finance

I have a pension that pays $65k per year - will that income prevent me from doing a smart Roth conversion?

Maurie Backman

Published: March 9, 2025 2:47 pm

There’s a reason workers are often advised to save for retirement in a Roth IRA or 401(k). Not only do Roth retirement plans offer the benefit of tax-free investment gains, but they also offer tax-free withdrawals.

Imagine not having to pay the IRS a dime of taxes on a major source of your retirement income. If you like the sound of that, then it pays to have money in a Roth account.

Also, Roth IRAs and 401(k)s do not force savers to take required minimum distributions (RMDs). RMDs effectively force you to spend down your savings in your lifetime. And because they apply to taxable money, they create an instant IRS liability.

Since Roth accounts don’t impose RMDs, they can double as a stealth estate-planning tool as an added bonus.

But what if you missed the boat on funding a Roth retirement plan while you were working? It may be that your 401(k) didn’t have a Roth option, or that you earned too much to fund a Roth IRA directly.

The good news is, it’s not too late. Savers are allowed to convert a traditional IRAs or 401(k) to a Roth accounts. And that’s a move this Reddit poster is contemplating. The only problem is that they’re collecting a $65,000 annual pension, which puts them in a position where they have to pay a decent chunk of taxes on a Roth conversion.

They’re wondering whether they should move forward in light of this. And I have some thoughts to share.

A Roth conversion is still a smart idea

The poster here probably knows that doing a Roth conversion will mean paying taxes on the sum that’s moved over. And if they and their spouse have $65,000 a year in pensions, as a married couple filing taxes jointly, they’re already in the 12% bracket.

But the near-term tax hit may be worth it for the promise of tax-free income later on. And also, depending on when they tap their new Roth account, they could be setting themselves up for many years of tax-free gains. So that right there makes the case for a Roth conversion.

Of course, one tricky thing is that the poster doesn’t say how much money they’re looking to move into a Roth account. So it’s hard to know what sort of tax bill they’re looking at.

But they should also know that a Roth conversion doesn’t have to be done all at once. It’s possible to convert some funds one year, more funds the next year, and so forth, to minimize each year’s individual tax bill.

It pays to talk to a financial professional

I think the poster here can benefit from having money in a Roth account. But I also think they should talk to a financial advisor or a tax professional to see what they have to say.

Someone who’s well-versed in Roth conversions can help them get their timing right to avoid a major tax hit. They can also share other strategies for maximizing retirement income and minimizing IRS obligations.