I Want to Roll Over $865k to a Roth IRA - Can I Do It Without Paying Taxes?

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Converting a large sum like $865,000 to a Roth IRA is a strategic move for long-term tax benefits – including tax-free retirement income and eliminating required minimum distributions (RMDs) –  but it often comes with a hefty upfront tax bill. The transition from a traditional IRA or 401(k) to a Roth IRA means paying taxes on the converted funds. But, with careful planning and strategic execution, it’s possible to minimize the tax impact. Here’s how you can do it.

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Understand the Basics of Roth IRA Conversions

When you convert funds from a traditional IRA or 401(k) to a Roth IRA, you’re essentially converting pre-tax dollars to after-tax dollars. This conversion triggers a taxable event, meaning you’ll owe income tax on the amount converted. The key to minimizing taxes lies in understanding the timing and amount.

Strategy 1: Partial Conversions Over Several Years

Instead of moving the entire $865,000 in one year, consider spreading it across multiple years. This strategy helps to avoid pushing yourself into a higher tax bracket. For example, if you’re currently in the 24% tax bracket, converting a large sum might push you into the 32% or 35% tax bracket, significantly increasing your tax liability.

Example Strategy:

• Year 1: Convert $200,000

• Year 2: Convert $200,000

• Year 3: Convert $200,000

• Year 4: Convert $200,000

• Year 5: Convert $65,000

By spreading out the conversion, you keep your taxable income lower each year, potentially saving thousands in taxes.

Keep in mind, any amount you convert will typically be subject to the five-year rule, which means you can’t withdraw the converted amount without penalty for five years after you convert it.

A financial advisor can help you devise a personalized conversion strategy to minimize your conversion taxes. Talk to an advisor today.

Strategy 2: Leverage Lower Income Years

If you anticipate a year with lower income — such as retirement or a sabbatical — that might be the ideal time to execute a conversion (though you may have to wait five years to use that income). During a lower income year, your overall taxable income will be less, which means the rollover amount will be taxed at a lower rate.

Example Scenario: If you retire at 62 and plan to start taking Social Security at 67, the years between 62 and 67 might be prime for Roth conversions. With no employment income and delayed Social Security, your taxable income is lower, allowing for a more tax-efficient rollover.