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If you've been accumulating a balance steadily in a traditional IRA or 401(k), you may be in for an unpleasant surprise. Once you turn 73 or 75, depending on your year of birth, you're going to have to take required minimum distributions, or RMDs.
RMDs can drive your taxes up, but that's not all. They can also lead to surcharges on Medicare premiums and taxes on Social Security benefits.
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If you want to avoid the hassle of RMDs, a Roth conversion could be the solution, allowing you to move funds from a traditional retirement plan to a Roth IRA. But it's important to do a Roth conversion carefully. Here are three tricks for a successful one.
A Roth conversion is a taxable event. If you do a $150,000 Roth conversion in 2026, for example, you'll owe taxes on it for that calendar year.
A smart move is to fill up lower tax brackets over several years rather than do a large Roth conversion all at once. If you convert an $850,000 balance in a single year, for example, much of that conversion will be taxed at the highest federal rate. If you split that conversion over five or six years, you may be able to stay within lower tax brackets, depending on your total income picture.
When stock values fall, the value of your IRA or 401(k) could dip temporarily. That actually gives you a prime opportunity for a Roth conversion.
Converting shares when they've lost value means you can lower your taxes in the course of a conversion. Then, once those shares recover their value, all of that growth is tax-free in a Roth IRA.
If you're going to do a Roth conversion, you need to make sure you have a way to pay the taxes. But that money ideally should not come from your IRA or 401(k). Instead, aim to use taxable dollars, like funds from a savings account or CD, to pay those taxes.
Let's say you do a Roth conversion that results in a $15,000 tax bill. If you take that $15,000 from your retirement savings, you'll lose out on tax-advantaged growth on that money in the future. Paying that tax bill with outside funds allows 100% of your savings to continue compounding inside your Roth IRA.
If you don't want to deal with RMDs, a Roth conversion is worth pursuing. Follow these tips to make yours as tax-efficient as possible.
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3 Roth Conversion Tricks to Use Before RMDs Strike was originally published by The Motley Fool
