I want to transfer my money to a Roth IRA. How to avoid paying taxes?

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


Generally, the answer here is no. There is generally no method to totally dodge taxes on a Roth conversion. Eventually, Uncle Sam will come to collect on your tax-deferred retirement accounts – whether that’s when you perform a Roth conversion, withdraw funds, or get your minimum required distributions (RMD).

That said, your inability to totally dodge taxes does not translate into an inability to reduce them. Here are some savvy strategies for reducing your tax bill during a Roth conversion. (For more information on taxes and retirement, consider working with a financial advisor.)

Strategies to Lower Your Tax Bill During a Roth Conversion

To reduce the tax consequences of switching from a tax-deferred account to a Roth, consider these methods:

Perform a tax-responsible partial Roth conversion

A strategy to reduce the tax burden of a Roth conversion consists of spacing your bearings over several years. To use this strategy, convert just enough to push your total income within your current tax bracket without entering the next bracket. (For more information on taxes and retirement, consider working with a financial advisor.)

Roll your money in a low tax year

For many people, a prime time for Roth conversions takes place during the years following retirement but before Social Security and RMDs come into play. These can be relatively low-income years where initiating a conversion can result in a triple benefit. These benefits are: lower tax bills, lower RMDs and future tax-free growth.

Speaking of timing, if you suspect that tax rates will increase at the scheduled end of the Tax Cuts and Jobs Act or due to political machinations on Capitol Hill, doing a Roth conversion now may be an option.

You will lock in your current tax rate and hopefully avoid any future increases. Remember that no one has a crystal ball and this strategy is all about making predictions about the future. (For more information on the impact of tax policy on retirement planning, consider working with a financial advisor.)

Pay tax wisely

Many experts recommend paying tax on your Roth conversion with non-retirement assets. This contrasts with withholding a portion of your retirement funds to pay the bill. This will allow you to transfer the larger amount to your new Roth account and continue to watch it grow tax-free.

Work with a financial advisor

A financial adviser may be able to help you take a holistic look at your tax and retirement profile, identifying opportunities to minimize taxes while adhering to an investment philosophy that matches your life stage.

A good advisor can explain to you whether a Roth conversion makes sense at this time. He or she can also discuss alternatives, such as converting your 401(k) to a traditional IRA, transitioning to a new employer 401(k) or make a partial conversion.

Tips for managing taxes in retirement

  • Find a financial advisor shouldn’t be difficult. SmartAsset’s free tool connects you with up to three approved financial advisors who serve your area, and you can interview your advisor for free to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, start now.
  • Consider a few advisers before settling on one. It’s important to make sure you find someone you trust to handle your money. When you consider your options, here are the questions you should ask an advisor to make sure you make the right choice.

Susannah Snider, CFP® is SmartAsset’s financial planning columnist and answers readers’ questions on personal finance topics. Do you have a question you would like answered? Email AskAnAdvisor@smartasset.com and your question may be answered in a future column.

Please note that Susannah does not participate in the SmartAdvisor Match platform and is an employee of SmartAsset.

Photo credit: ©Jen Barker Worley, ©iStockPhoto/AndreyPopov

Susannah Snider, CFP®
Susannah Snider is the Financial Education Editor at SmartAsset, where she oversees the strategy and production of all specialized personal finance content, including commentary and columns from CFPs and other finance professionals. Additionally, Susannah writes articles, newsletters, columns, and commentaries found on SmartAsset.com and syndication partner sites. She is also a spokesperson and cited expert on a wide range of personal finance and financial planning topics, including retirement, investing, estate planning, mortgages, and more. Susannah obtained her CFP designation in 2019 and uses her expertise to easily explain complex financial topics with an accessible tone. Prior to SmartAsset, Susannah was Senior Editor for Financial Advisors at US News & Global Report. She has also covered personal finance, careers, and college finance for US News and worked as a staff writer for Kiplinger’s Personal Finance magazine. She is a recipient of the McGraw Fellowship for Business Journalism program and won the RTDNA/NEFE Excellence in Personal Finance Reporting 2018 award in the digital category. Susannah holds an undergraduate degree from the University of Rochester and a master’s degree in journalism from the University of Southern California. Susannah has appeared as a personal finance expert on Cheddar, Fox & Friends, The Tavis Smiley Show, Your Money on Wharton Business Radio, Fox Business News and more.

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