If I have a tax-deferred 401(k). Can I convert to a Roth IRA without paying the deferred tax?
– Tommy
Generally, the answer here is no. There is no method to completely avoid tax on a Roth conversion. Finally, Uncle Sam comes to collect on your tax-deferred retirement accounts — either when you do a Roth conversion, cash out, or your Minimum distribution required (RMDs)
That said, not being able to avoid taxes entirely doesn’t mean you can’t deduct them. Here are some smart strategies to minimize your tax bill on a Roth conversion. (For more information on tax and pensions, Consider working with a financial advisor.)
Strategies to reduce your tax bill on a Roth conversion
Consider these methods to minimize the tax consequences of rolling over a tax-deferred account to a Roth:
Execute a tax-aware partial Roth conversion.
one Roth conversion strategy to reduce tax liability It includes your rolling mileage for many years. To use this strategy, change just enough to push your total income over your current tax bracket limit without entering the next bracket. (For more information on tax and pensions, Consider working with a financial advisor.)
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Spend your money in a low tax year
For many people, a Prime time for Roth conversions It is done in the years after retirement but before that Social security And RMDs started: Those may be the relatively low-income years when starting conversions during this time can have a triple benefit. These benefits include: lower tax bills, reduced RMDs and future tax-free growth.
Speaking of timing, if you suspect that tax rates will increase with the proposed sunset Tax Cuts and Jobs Act Or because of the political machinations on Capitol Hill, a Roth conversion may now be an option.
They lock in your current tax rate and avoid future increases. Remember that no one has a crystal ball, and this strategy involves making predictions about the future. (For more information on how tax policy affects retirement planning, Consider working with a financial advisor.)
Pay your taxes wisely.
Many experts recommend paying taxes on your Roth conversion with non-retirement assets. It’s the opposite of withholding some of your retirement funds to pay the bills. This allows you to move the maximum amount into your new Roth account and continue to watch it grow tax-free.
Work with a financial advisor
Financial advisor It can help you get an overview of your tax and retirement profile by identifying opportunities to minimize taxes by adopting an investment philosophy that matches your stage of life.
A good advisor can talk to you about whether a Roth conversion makes sense now. He or she can also discuss options such as converting your 401(k) to a traditional IRA, transferring to a new employer, etc. 401(k) or partial conversion.
Tips for managing taxes in retirement
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Finding a financial advisor It should not be difficult. SmartAsset’s free tool It matches you with up to three vetted financial advisors in your area, and you can interview your advisor at no cost to decide which one is right for you. If you’re ready to find an advisor to help you achieve your financial goals, Start now.
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Consider a few consultants before settling on one. It’s important to make sure you have someone you trust managing your money. When considering your options, These are the questions you should ask a counselor. To make sure you make the right choice.
Susannah Snider, CFP® is SmartAsset’s financial planning columnist and answers reader questions on personal finance topics. Have a question you want answered? Email [email protected] and your question may be answered in a future column.
Please note that Susanna is not a participant in the SmartAdvisor Match platform and is an employee of SmartAsset.
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