Is it possible to move money to a Roth IRA and avoid taxes?

If I have a tax deferred 401(k). Can I convert it to a Roth IRA without paying taxes deferred when I roll it over?

-Tommy

In general, the answer here is no. There is usually no way to completely avoid taxes on Roth conversions. Eventually, Uncle Sam will come to collect your tax-deferred retirement accounts — either when you do a Roth conversion, withdraw the money, or collect your money. Required minimum distributions (RMDs).

However, being unable to completely avoid taxes does not translate into being unable to reduce them. Here are some smart strategies to reduce your tax bill when you convert a Roth. (For more information about taxes and retirement, Consider working with a financial advisor.)

Strategies to reduce your tax bill when converting a Roth

To minimize the tax consequences of converting a tax-deferred account to a Roth, consider the following methods:

Implement a partial Roth conversion for taxes

one A strategy to reduce the tax liability for a Roth conversion It involves spacing out rollovers over several years. To use this strategy, transfer only enough to push your total income within your current tax bracket without entering the next bracket up. (For more information about taxes and retirement, Consider working with a financial advisor.)

Roll your money around in a low-tax year

For many people, a Prime time for Roth conversions It occurs during the years following retirement but before that Social security These can be relatively low-income years during which initiating a conversion can pay a triple dividend. These benefits are: lower tax bills, lower regulatory risk, and tax-free future growth.

Speaking of timing, if you suspect that tax rates will rise around the expected sunset Tax Cuts and Jobs Act Or because of political machinations on Capitol Hill, a Roth conversion could now be an option.

You’ll lock in your current tax rate and hopefully eliminate any future increases. Keep in mind that no one has a crystal ball, and this strategy involves predicting the future. (For more information about how tax policy affects retirement planning, see Consider working with a financial advisor.)

Pay tax wisely

Many experts recommend paying the tax on your Roth conversion using non-retirement assets. This is opposed to withholding some of your retirement funds to pay the bill. This will allow you to move the largest amount into your new Roth account and continue to watch it grow tax-free.

Work with a financial advisor

Financial advisor They may be able to help you take a comprehensive look at your tax and retirement profile, and identify opportunities to minimize taxes while adhering to an investment philosophy that suits your life stage.

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