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4 More Ways to Roth Your Investments


Generally it's to your advantage to choose a Roth account over a traditional account if you think that you'll pay higher taxes when you withdraw the money than you do now. These four methods can help you get there.

IRA coins

Earlier I wrote an article describing three ways you can Roth your investment portfolio. Here are a few more way you can get there:

Path #4: Convert your traditional IRA to Roth IRA and pay taxes

Let’s say you take a year “off” and work part time for one year before going back to full-time work the next year, or suppose your spouse loses his/her job and generates no income for a year. In this case you might fall into a lower income tax bracket this year than next year. If so, you can convert all or part of your traditional IRA or SEP IRA this year to a Roth IRA. To do this, you open a Roth IRA account and specify the dollar amount you want to convert to a Roth IRA on a Roth conversion form. Assets are then transferred from your traditional or SEP IRA to your Roth IRA. Assuming that all of the converted money was pretax, then you’ll pay taxes in the year you convert.

Path #5: Convert your traditional IRA to Roth IRA and pay no taxes

If you have a $0 balance in all traditional IRA and SEP IRA accounts combined, you can make a nondeductible (post-tax) contribution to a traditional IRA and then convert that nondeductible money to a Roth IRA. In this case because you are converting post tax money to a Roth IRA, you will not owe income tax on the conversion. While this sounds pretty easy, there are large number of pitfalls that can screw up this strategy, including rollovers from outside accounts, not accounting for all of your IRA balances, not filling the appropriate tax forms, and many others. So tread carefully and know what you’re doing before attempting this.

Path #6: Convert your traditional 401k to Roth 401k or Roth IRA and pay taxes

Suppose you are an employee and made contributions previously to only your traditional 401k account on a pretax basis. Now you regret that decision and you wish you could have changed that to the Roth 401k. Recently the IRS started allowing “in-plan Roth conversions.” This means that even if you are actively employed you can convert pretax money from your traditional 401k to your Roth 401k. Be careful here. Remember that you’ll owe tax on the conversion because you’re converting pretax money to a Roth 401k. The tax must be paid outside of your 401k account and cannot come from withholding taxes on the conversion. When you leave an employer you also have the option of rolling over your pretax traditional 401k into a Roth IRA and owing taxes in that process.

Path #7: Make after-tax contributions to your 401k and rollover to a Roth IRA

This method is complicated and filled with potential tax mistakes so it’s probably best for most physicians to avoid, but if you’re hell bent on getting a ton of money into a Roth IRA it might work if a number of conditions are met. Some 401k plans allow you to make after-tax contributions to your traditional 401k. This is separate from the Roth 401k. In other words you can contribute your employee contribution of $18,000 (or $24,000 above age 50) to a Roth 401k and then on top of that you can contribute after-tax contributions to the traditional 401k side if your plan allows that feature. Later on you when you leave that employer you can rollover not only your Roth 401k to a Roth IRA, but you can also rollover your after tax contribution in the traditional 401k to a Roth IRA. Any pretax money in the traditional 401k would be rolled over into a traditional IRA. You might even be able to structure this so that you can rollover the after tax money to a Roth while you are still employed if your plan allows for it.

As you can see you can use one method or a combination of methods to get to the Roth structure, but be warned that mistakes can be costly and in some cases can’t be undone.

Setu Mazumdar, MD, CFP® is board certified in EM and he is the president of Physician Wealth Solutions. www.physicianwealthsolutions.com

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