If I have a tax-deferred 401(k). Can I convert it to a Roth IRA without paying the deferred taxes when I roll it over? -Tommy Generally, the answer here is no. There’s typically no method to totally dodge taxes on a Roth conversion. Eventually, Uncle Sam will come to collect on your tax-deferred retirement accounts – either when you execute a Roth conversion, withdraw funds or collect your required minimum distributions (RMDs). That said, your inability to totally dodge taxes doesn’t translate to an inab ...

Core Insights - The IRS mandates required minimum distributions (RMDs) from retirement accounts starting at age 72, which can lead to significant tax implications for retirees [2][3] - RMDs can increase taxable income, potentially pushing individuals into higher tax brackets and affecting Social Security benefits and Medicare premiums [3] - A strategy to mitigate RMD tax liabilities involves using qualified charitable distributions (QCDs), allowing individuals to donate up to $100,000 to charities without incurring taxes on the withdrawal [5][6] RMD Overview - RMDs are designed to ensure the IRS collects taxes on funds that have grown tax-deferred in retirement accounts [2] - The age threshold for RMDs is 72, or 70.5 for those born before July 1, 1949 [2] - RMDs were suspended for the 2020 tax year due to the pandemic but resumed in 2021 with no indication of further suspension [3] Tax Implications - RMDs can elevate taxable income, which may result in higher tax brackets and increased taxation on Social Security benefits [3] - The use of QCDs can help avoid income tax on RMDs and lower future RMD amounts based on life expectancy [5] QCD Benefits - QCDs allow individuals to make charitable contributions directly from their IRAs, providing tax advantages even for those who do not itemize deductions [6] - Contributions must be made directly to IRS-approved 501(c)(3) charities and cannot include after-tax rollovers or nondeductible contributions [8] - QCDs are only applicable to IRAs and IRA-based plans, excluding employer-sponsored plans like 401(k)s [7]

Core Insights - The conventional strategy of deferring tax-deferred retirement accounts until the end of retirement may need reevaluation, as minimizing overall taxes during retirement could be more beneficial [2][5] - Financial advisors suggest using tax-deferred accounts for living expenses or converting portions to Roth IRAs before claiming Social Security to take advantage of lower marginal tax rates [3][8] Tax Considerations in Retirement - Collecting Social Security benefits while withdrawing from tax-deferred accounts can lead to taxation on those benefits, with single filers earning between $25,000 and $34,000 taxed on 50% of benefits, and those over $34,000 taxed on up to 85% [5][6] - The income thresholds for taxation on Social Security benefits have not been adjusted for inflation or wage growth since their introduction, leading to more retirees being affected by what is termed the "tax torpedo" [7] Strategies to Minimize Taxes - One effective strategy to avoid the "tax torpedo" is to withdraw from tax-deferred accounts before claiming Social Security benefits [8] - Compounded earnings in a taxable 401(k) or traditional IRA yield less after taxes compared to tax-free Roth IRA earnings, which do not count towards combined income [9]