I Want to Convert $500k in My 401(k) to a Roth IRA. How Do I Avoid Paying Taxes?

You can’t avoid taxes when converting to a Roth IRA, but certain strategies can help reduce the impact. Converting funds from a pre-tax account like a 401(k) or a traditional IRA to a Roth IRA means paying income tax on the amount transferred. The benefit is that future withdrawals are tax-free, which can be valuable in retirement. However, a conversion only makes sense if the upfront tax cost does not exceed the long-term savings.

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Eligibility for Roth IRA Conversions

You can move money from most qualified retirement plans to a Roth IRA, and there are no income limits on conversions. Many high earners use a “backdoor conversion,” contributing to a traditional IRA and then converting it to a Roth. This approach is legal and effective, but repeated conversions can trigger extra taxes under the “pro-rata rule.”

While your 401(k) would incur taxes with each withdrawal made in retirement, Roth IRA withdrawals beyond age 59 1/2 are not taxed. Therefore, if you have time left for your assets to grow, or expect to have a higher tax rate in retirement than you do currently, converting to a Roth IRA may net you a more in retirement. However, if you are already very near retirement or expect to have a lower tax rate when you make withdrawals, the conversion may not be worth it.

Roth IRA conversions go one way. You can convert a pre-tax account to a Roth account, but cannot convert a Roth account to something like a traditional IRA or 401(k). This is particularly important because it means that you cannot unring this bell once you get your tax bill. Once you make a conversion, you must deal with the taxes.

Talk to a financial advisor to create strategy that aims to maximize your retirement income.

How to Minimize Taxes On Your Roth Conversion

If you have $500K in a Roth 401(k), you will not owe any taxes when you make your conversion. These are both post-tax accounts, so you can execute a rollover or transfer with no tax event.

If you are holding this money in a pre-tax account, such as a 401(k) or IRA, the situation becomes more complicated. When you move this money, you will add the full value of the transfer to your taxable income for the year. Here, for example, you would add up to $500,000 to that year’s adjusted gross income (AGI).

As a result, it is often wiser to break a large conversion into smaller amounts staggered over time. This way, you do not trigger a huge tax bill and land in a higher tax bracket in any given year. Converting $500,000 in a single year could potentially push your total AGI into the highest federal tax bracket (37% for tax year 2026, plus any applicable state and local taxes).

However, if you have time to spread the conversion out over five years, for example, you can remain in a lower tax bracket by adding $100,000 each year to your AGI. Depending on how you file taxes and the corresponding thresholds, you could save tens of thousands of dollars with this strategy.

A financial advisor can help you determine the best strategy for your assets.

Weighing Your Anticipated Retirement Date

Beyond that, the biggest issue is when you anticipate retiring.

A Roth IRA is one of the most useful tax-advantaged retirement accounts on the market, but that value depends largely on having enough time to make big, untaxed gains. If you plan on retiring in the next few years, you probably won’t see much in tax-free Roth gains to offset the tax bill from the conversion.

It’s also important to consider your planned retirement income and tax bracket.

The difference between a pre- and post-tax account is when you pay your taxes. With a Roth account you pay up front, with a 401(k) or IRA you pay when make your withdrawals. So a Roth portfolio can lose some advantages if you pay a much higher tax rate while working than you will once you have retired.

For example, say that you currently pay a 20% effective tax rate and anticipate a 10% effective tax rate in retirement. You might pay $100,000 on the conversion (0.2 * $500,000) vs. $50,000 over time on the withdrawals (0.1 * $500,000).

Now, this is just by way of example. Taxes in reality are much more complicated, but it serves to illustrate the point. If you have the time for your Roth IRA to grow significantly and you expect to be in a comparable tax bracket once retired, this might be a wise conversion. If you do not have time for this account to significantly grow and/or you expect to be in a significantly lower tax bracket in retirement, you might actually pay more on a Roth IRA conversion in the long run.

Remember, if you need help with taxes or a retirement strategy, you can get matched with a personal financial advisor.

Coordinating Roth Conversions With Other Retirement Income

When you convert to a Roth IRA, the timing can affect how your other income is taxed. A large conversion can raise your AGI for the year, which may cause more of your Social Security benefits to become taxable. It can also increase what you pay for Medicare premiums under income-related adjustments.

If you are already taking required minimum distributions (RMDs), you must take them before converting any remaining balance in your traditional IRA. RMDs cannot be converted to a Roth IRA. Many people choose to make conversions before RMDs begin at age 73 so they can control the amount of taxable income added each year.

Other income sources, such as capital gains, dividends and part-time earnings, can also combine with a conversion to raise your total taxable income. Doing conversions in smaller amounts during years when your income is lower can help limit these effects and keep you in a lower tax bracket.

Bottom Line

You cannot avoid paying taxes on a Roth IRA conversion. This is a post-tax account, so you must pay income taxes on the money you put in. For large retirement accounts, this makes a conversion complicated. It can be a good idea if you have the money to pay that bill and the time for your account to grow, but be careful not to trigger more taxes in the long run.

Roth IRA Management Tips

It’s easy to consider Roth IRAs the golden goose of retirement, and for most people this really is the best product on the market. Still, it’s important to consider both the pros and cons of investing in Roth IRAs.
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