Article Date:
September 2015

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Use These Strategies to Avoid Getting Slammed with Taxes When You Roll Over a Traditional IRA to a Roth

Estimated tax savings. If you convert your traditional IRA to a Roth IRA, you create taxable income that could slam you with a large tax bill. But with a bit of planning, you can make that entire bill disappear, saving thousands in taxes.


You may want to open a Roth IRA to take advantage of tax-free withdrawals when you retire. Just the thought of those earnings accumulating for 20 to 30 years without Uncle Sam getting a dime of them has you licking your chops!


But then you checked the tax law and realized your income is too high for you to contribute to a Roth IRA. You’re not eligible ($131,000 if you’re single, or $193,000 if you’re married filing jointly in 2015).1


First the good news—there are no income limits on contributions to a traditional IRA, and you can get around the Roth restriction by rolling over your traditional IRA to a Roth IRA. In 2010, lawmakers removed the income restriction for rollovers, so today everyone is eligible to roll over a traditional IRA to a Roth IRA.


Now for the not-such-great news—when you roll over the funds from a tax-deferred account such as the traditional IRA to a Roth, you can get slammed with a hefty tax bill. Why slammed? Because when you made your original contributions, you deducted them, plus you have been accumulating earnings inside that IRA on which you have not yet paid taxes.


Remember, the purpose of the Roth IRA is to keep Uncle Sam’s sticky fingers away from your money—you contribute with post-tax dollars, and in return those sticky fingers won’t touch a dime when you eventually withdraw them.


When you roll over a traditional IRA to a Roth, you need to turn those traditional IRA funds into post-tax dollars by paying back Uncle Sam for those tax benefits you already received and paying taxes on those untaxed earnings. This can produce a large tax bill in the year you roll over those funds.


Now for the best news of all—this article gives you three surefire strategies that not only minimize your tax bill when you roll over the funds to a Roth IRA, but in some cases also eliminate the taxes completely! ... Log in to view full article.

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